The impact of current falling oil price in the long term for specific places The falling oil prices might be a reprieve to the consumer’s pockets, but it is a worrying situation for countries that rely on the commodity through extraction or in construction of pipelines that help move the same as intimated by Silverstein of Forbes Magazine. For oil producers, cheaper oil prices translate to reduced profit levels for them and major hit to the expansion of the economies they come from. The countries that have been worst hit by this are the USA, Saudi Arabia, Asia, Russia and other European countries that are either involved in the extraction of oil or in the setting up infrastructure that helps in moving the commodity.
The greatest reason that has influenced oil prices around the globe to fall is that oil suppliers are oversupplying the commodity and also because the dollar has continued to gain strength. Lee of the LA Times predict that oil-drillers are likely to stop drilling because they might not have a market for this commodity, which might in turn influence them to lay off workers and many factors that are affected by this occurrence.
In essence, the world today heavily relies on oil to propel its industries that are require fuel so as to make the production process to go on, but lately there has been a change in this demand with the introduction of alternative energy sources such nuclear power. From an economic perspective, when oil prices are high, oil extractors are encouraged to keep drilling for this commodity because this is a sign that there is ready market.
Low prices on the other hand, attract secondary effects such as job losses, and poor performance by banks because oil drilling can no longer take center stage. Essentially, when bank performance is affected at the country level then chances are that international trade will be affected because of limited cash flow. Tverberg suggests that economies that heavily rely on oil production are also likely to perform dismally because there would be high default rates that would result from deflation. The defaulting may either be direct by borrowers that have taken loans from banks, indirect through bank securities that the banks could have used to seek facilities else where or from liquidity problems.
Thirdly, the escalating interest rates and currency levels are likely to influence derivative defaults as this changes is mostly passed on to the borrower who had not anticipated such an effect on the loans that they had taken hence leading to unintentional default. Some countries such as Russia have maintained that they would not reduce oil production so as to influence an increase in oil prices, which is a stand OPEC also abides by meaning that oil prices are likely to remain low a while longer.
This coupled with the sanctions that it received for its involvement in the Ukraine separation have hit this economy hard with economists forecasting that 2015 will not be a good year for Russia economy-wise. Additionally, the interest rates in terms of lending among Russian banks is likely to soar because of the low spending rates and reduced borrowing due to stunted economic growth. One of Opec’s most influential members state, Saudi Arabia has not refused to relent towards reduced oil production so as to help it navigate the current oil dipping turmoil.
In essence, this is seen as a disciplinary move by Opec to its members during this time of oil prices crisis, but not all members are likely to face the effects. Saudi Arabia for example, is able to with stand the occurrence of low oil prices because it has a reserves fund of at least $700bn, which can help the country to stay afloat for sometime even when it is not making profits from the current oil price situation as intimated by Bowler of BBC News.
Other than Saudi Arabia, other Gulf region oil producers also have foreign currency reserves unlike other Opec members such as Libya, Iran and Nigeria who do not have reserves and are hoping for the a better handling of the current oil price situation by Opec. Further, Bowler asserts that the falling oil prices seem to be bringing mixed fortunes for Asian countries and other European nations because it seems to be an opportunity for them to grow their economies.
China, whose economy is fueled by oil is a country that has been benefitting from the low oil prices because it has become cheaper for them to import oil so as to service its industries. The operational costs that result from exporting oil at high prices seem to have gone down, which is an opportunity for growth while the oil prices are still low. Japan has also benefitted immensely from falling oil prices as it has made importation of oil to be low for this country.
When the oil prices were high, Japan used to struggle with high inflation rates, which was not favorable to its economy in which now the Japanese economy is set to grow through combating deflation in the country. On the other hand, the USA through its shale oil have also contributed to the falling of oil prices because the country considers itself to be at the peak of oil production that has influenced its energy production levels to also soar. Despite the prices being low, oil producers in this country have no option other than to continue drilling an dumping oil because it is their only source of revenue that can allow them to repay the many debts that they have taken for themselves and their companies.
Currently, the USA according to Silverstein, surpasses Saudi Arabia’s oil production as it produces at least 8.4 million barrels a day and this production is also set to go up in the future. Based on this, there is a minimal or no chance that the US will decrease oil production as the country seeks to maintain its production level to be at this high.
Additionally, the sates that are heavily reliant on shale oil extraction seem to be performing far better financially as compared to the states that do not hence making it impossible for the US to be affected by the global falling of the oil prices. If they decrease production, then chances are that these states are likely to witness high unemployment rates making it pertinent for these states to continue production so as to avert further crisis as suggested by Weiss of Woodward News.
Work cited Bowler, Tim. Falling oil prices: Who are the winners and losers? . BBC News. 19 Jan. 2015. Web. 23 Apr. 2015. Lee, Don. Falling crude oil prices: How long will it last? . LA Times. 29 Jan. 2015. Web. 23 Apr. 2015. Silverstein, Ken. How falling oil prices will impact economy—and the Keystone Pipeline debate. Forbes Magazine. 9 Jan. 2015. Web. 23 Apr. 2015. Tverberg, Gail. Ten Reasons why a severe drop in oil prices is a problem.
Our Finite World. 7 Dec. 2014. Web. 23 Apr. 2015. Weiss, Kevin. Oil prices could eventually affect unemployment rates. Woodward News. 2 Jan. 2015. Web. 23 Apr. 2015.