Why the Oil Prices are Going Down

The prices of oil are on the wane and might touch the lowest point in history. The price of crude oil was $60/barrel a few months back but now it has come under $30 per barrel. The question rises why this curve is going downwards. This is because of the rivalry among the three only producing giants; the USA, Russia, and KSA. This low price will not only affect the global economic outlook but will also disturb the geo-politics. To understand this downward curve of the prices; it is imperative to understand the fundamental concept of economics.

Demand-Supply Concept:

The concept of demand-supply in the free market is understood by almost everybody. When the supply is more than the demand for a product; the prices go downward and vice-versa.

Total Competition:

In the environment of total competition; there is always competition among the sellers to sell the product at the lowest rate to gain more profit by an increase in sales. This is why sometimes a force is needed to maintain the rates in the market which will allow all the sellers to earn a respectable amount of money. This is the reason an alliance exists among few countries known as OPEC which maintains the rates of oil. There are almost 13 big oil-producing countries that are part of OPEC excluding the USA and Russia.

The Making of OPEC+:

An agreement was signed between the OPEC and some non-OPEC countries in December 2016 to make OPEC+. In this agreement, Russia was also included to make the new cartel. The USA still did not join it and remained its competitor in the market. OPEC+ decided to lower the daily oil production to maintain the prices. It was running smoothly until March 5, 2020.

Current Scenario:

In the current outbreak of Covid-19, the demand for oil was diminishing around the world because of the closure of air travel, shipping, schools, and industries. Observing this grim situation, OPEC countries decided to lower the production and informed about it to OPEC+ but Russia did not like it and pulled out of it. Russia not only pulled out of it but also increased its daily production to a greater extent. Seeing the behavior of Russia; KSA also increased its oil production. This further hike in production led to further lowering of the oil rate in the global market. There are speculations that Russia did this to hit the oil industry of the USA. The question arises here what allows Russia to think that it can hit the USA’s industries by increasing oil production?

 It must be remembered that the USA has not been an oil-exporting country since long rather it used to import oil a decade ago. However, the Shale Energy Revolution occurred post-2010 in the oil industry of the USA and it became an oil-exporting country and became a global oil exporter giant. It started producing oil even more than Russia and KSA. This is the best time to eliminate the USA from the oil industry by lowering the prices. It must be kept in mind that the oil-producing industries in the USA are private while in Russia and KSA; the companies are owned by the government. Seeing this, Russia decided to surge the oil production to inflict losses to the private companies of the USA. Indeed, Russia itself is also undergoing the losses but the government of Russia can resist this loss but for the private companies of the USA the story says otherwise. In this scenario, KSA can also endure the losses but the USA private companies will go bankrupt.

In the wake of this oil battle among the oil-exporting giants; small countries will be affected most. They would also not be able to withstand this pressure and might go bankrupt. But, other large oil-importing economies can get benefit from this battle of oil. Countries like China, India, Japan, and other large importers will be the real benefit holders in this situation. It is the best time for such states to gain as much benefit from this situation as much they can.

About the Author

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    Huyen Trang Dang

    Huyen Trang Dang works as a Creative Manager in an international shoe company. Her core competencies are social media marketing and brand building. Even though Dang is a graduate in Business Economics; she has been working as a Social Media ... [ Read more ]

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