The falling oil prices are not just the function of demand and supply. In last six months oil prices had fallen upto 40% in global market. In Pakistan, we have seen reduction in oil prices by approximately 20%.
Where on one hand, I think people should get as much relief as possible and on the other I wanted to know the reasons for falling oil prices. This search lead me to an amazingly simple article at The Economist(TE). What I learned is, there are three main reasons besides many different variables for price reduction:
1. The sluggish global economic situation, where consumption of oil is less than anticipated.
2. “America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply” (TE).
3. “Finally, the Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. They could curb production sharply, but the main benefits would go to countries they detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves. Its own oil costs very little (around $5-6 per barrel) to get out of the ground” (TE).
This means if Gulf states reduce their production/pumping to get prices on previous states, it won’t benefit them but other producers like, Iran and Russia, while Saudi’s production cost is the lowest in world, so they are still making huge profits even on reduced prices. Saudi Arabia had tried to reduce pumping oil in mid 1980s to take prices higher but instead lost its market share.
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