The Forever Oil Prices Battle
Why the oil price stays low for the coming years
A further recovery in the oil price is expected to be still far away. After the massive drop in prices last year, oil prices reached the highest point in May since the slow recovery has started in January. But the downward pressure on oil prices is on the rise again.
As fuel and energy prices move alongside oil prices, individuals came out a bit cheaper when filling the tank of their cars and could also save a bit on overheads at home. Many companies also decreased their costs, especially due to lower transport and energy prices. But the big oil companies who want to sell their products preferably at the highest possible price booked substantial profit losses. To better visualize the magnitude of their loss (which is actually our gain), the lowest price was below $ 50 a barrel last November, more than 50% cheaper compared to the peak last June at $ 114 (now its around $ 63).
The fundamental problem is an oversupply and this situation will not change in the short term. Last week, OPEC, the oil cartel, did not change its policy on its production quota of 30 million barrels per day, and thus aims to maintain its share on the market. It means that the current overproduction is maintained by particularly Saudi Arabia. The most important country within OPEC can produce at low prices and does not want to give up market share.
As opposed to it, the technique by which shale oil is extracted from the ground is much more expensive, low oil prices hit shale oil producers therefore harder. Oil shale is an underground rock formation with high oil content and as they are solid and cannot be pumped directly out of the ground, the oil shale must first be mined and then heated to a high temperature. The US has huge reserves but up until very recently, extraction was thought to be unprofitable.
Saudi Arabia has tried to push shale oil out from the market, but that they did not succeed. The United States still keeps up as the production of shale oil is profitable again due to improved extraction methods and technology.
Besides the fundamental issue of oversupply, dollar has also become stronger again, partly due to increased concerns about the situation in Greece while oil demand from emerging markets such as China will grow less quickly in the coming years. This is partly a direct result of the gradual slowing down of the economic growth in China.
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