Oil price drop: Then and now
In July 3, 2008, oil price (West Texas Intermediate) almost breached US$150.00 per barrel. Well aware that the prices in August 21 and 22, 2007 were less than US$70.00 per barrel made us all shiver. In simple math, it meant that in less than a year, oil prices more than doubled. With such seemingly irreversible trend, oil prices reaching the US$200.00 per barrel was then viewed as unquestionable. The question was - when? Contrary, however, to most expectations, oil prices dropped sharply and was hovering around US$40.00 per barrel by the end of 2008.
The reason then was very obvious. The world’s biggest consumer is the USA. They consume more than 20 million barrels a day or more than ¼ of the world’s output. Therefore, demand for oil is, was, and will always be largely influenced by USA’s industrial and personal consumers’ behavior. Then, the USA was in dire economic crunch. Then, their economic turmoil traversed all over the globe. Manufacturing and financial companies were closing down. Foreclosures of mortgages were unabated. Consequently, economic activities like manufacturing had largely slowed down. As these manufacturing outfits used to consume sizable quantities of oil, their demand therefore had substantially dropped. On the other hand, as 88% of the US workforce travels by car, a sizeable chunk of the country’s consumption was eaten by this sector. As more of them were losing jobs then and were opting to use public transport instead, their oil purchases have considerably dropped as well.
Then, in the second half of year 2009 and the entire year of 2010, we saw oil prices swinging between US$60.00 and US$90.00 per barrel. Without much changes in the political and economic arena in 2009 when compared to 2008, people were wondering why oil prices went up to such level. The fact is, oil producing countries have different preferential prices. Likewise, pundits have varied expectations as far as how much oil must be priced. Deutche Bank, for one, in 2008, calculated how high oil prices have to be for OPEC countries to maintain their budgets. Iran and Venezuela, two of the most vocal and seemingly arrogant countries who are often the first to call for production cuts, need the highest price per barrel of US$95. Russia needs about US$70, while Saudi Arabia, OPEC's largest producer and de facto ruler, needs about US$55 a barrel. But taking all these measures together, the bank says US$60 a barrel seems like a probable place for oil prices to bottom out.
Obviously, while, then, such development was bad news for Russia, it was certainly worst for Iran and Venezuela. On hindsight, however, it was a happier scenario for the rest of the world as it shall, supposedly, temper Iran’s and Venezuela’s arrogance. But then, again, OPEC, being the world’s biggest cartel, opted for production cuts, as usual, and moved prices slowly but surely around US$90.00 per barrel in 2011. Then, in 2012, with the political turmoil prevailing in most oil producing countries in the Middle East, production was severely affected and prices breached US$100.00 per barrel once again. Then, as the USA slowly recovered, we saw prices steadily hovering around US$100.00 per barrel in 2013 and most of the months in 2014.
Today, however, prices are going down again. At some point, it went a shade below US$80.00 per barrel. Now, people are again wondering. Curiously, however, for a different reason. Rightly so, because, for one, the scenarios for price decreases and increases then are totally different now. Then, when the USA’s economy goes down, oil prices go down as well due to the lack of demand. But that is not true today. They are a lot better today than in 2007 or 2008. They have withered the economic storm, so to speak. Therefore, oil prices should have either remain steady or up. Moreover, the ISIS is wreaking havoc in the Middle East far worse than all uprisings in the past few years combined. Therefore, logically, just like before, it could have affected production as well. So that, prices could have gone up too. But no, it didn’t.
The truth is, the USA, the world’s largest consumer, has increased its own oil production and, thus, has become less dependent on imports. This fact was confirmed by the U.S. Energy Information Agency. The agency reported that, “in 2013 the U.S. imported approximately 33% of the petroleum consumed, the lowest since 1985. It also means, “net crude oil imports are down over 25% in the last five years while the country is still more than 20% below its peak production of 1970”. Moreover, they are now less dependent on oil imports from the Middle East. They are now importing most of their requirements from Canada. Therefore, OPEC has drastically lost its clout and could no longer influence or manipulate oil prices.
Is this situation good for us, Filipinos? Of course. It’s a no brainer.
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