Freefall in Oil Prices Will Have Global Impact





Oil Rig Illustration / Icon - Black and WhiteOil prices continued their freefall on Friday after OPEC revealed that they would not be cutting their 30 million barrels per day of production. This announcement came as a surprise to many, as oil prices continued to sell off dramatically after the news was released.

OPEC, which stands for the Organization of the Petroleum Exporting Countries, is a cartel that seeks to co-ordinate the policies of the members nations in regards to oil production. By acting in concert, OPEC nations will look to influence global oil prices and maintain a steady source of income. The twelve member nations are: Iraq, Kuwait, Iran, Saudi Arabia, Venezuela, Algeria, Angola, Ecuador, Libya, Nigeria, Qatar and the United Arab Emirates.

If you doubt the power of OPEC, just look back to the '70s and '80s when the world had to endure several oil spikes. One of these oil spikes caused the recession in the early '80s that pushed unemployment rates to over 10% in the United States.

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OPEC has a problem right now - shale-oil producers are messing with global oil prices.

The United States, for instance, which is the world's largest consumer of oil, has been able to ratchet their production of oil up to 9 million barrels per day. Other shale-oil producers, such as Russia and certain Latin American countries, are also flooding the global market with oil. This has led to an excess of supply - it's estimated that the world is producing 700,000 more barrels per day than it needs right now. With higher supply comes lower prices, and these prices have absolutely plummeted over the past couple of months.

In the past, OPEC would simply (and temporarily) scale back their production in order to decrease supply and increase prices. The problem, however, is that the United States has dramatically increased their own extraction of oil over the past decade, which has mitigated the impact of any move that OPEC might decide to make.

This phenomenon has caused OPEC to take a completely different tact. By refusing to lower production (even though member state Venezuela desperately wants higher prices), OPEC is taking the long term view by temporarily sinking oil prices. OPEC, whose member nations can extract oil much more cheaply than the United States, are looking to tank oil prices so that the cost of extracting oil in the United States becomes unprofitable. OPEC is hoping that new projects will be put on hold (pipelines, etc) and potentially scrapped in the United States and abroad and that the United States' production numbers will plummet as a result. This will result in decreased supply which will eventually translate into higher prices.

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With oil prices currently at five year lows, many are wondering just how far prices will fall before stabilizing. January Brent crude is currently trading at about $70/barrel, down 18% on the month. A number of analysts and market observers believe that the bottom is around $65/barrel.

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In the end, this is a fascinating global chess match that impacts literally every country in the world.




Filed under: General Knowledge

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