Sliding oil prices – what’s in it for us?
CNBC reported that OPEC oil ministers agreed on Wednesday to remove a record 2.2 million barrels per day from oil markets in a race to balance supply with the world’s rapidly crumbling demand for fuel.
The main reason behind this cut is to ensure that the oil prices do not continue to decline and hopefully, will go back up to USD75, where it is deemed to be “fair”. However, the last check on CNBC’s website reveals that oil is now below USD41 and continues to slide.
One of the reasons provided for a fall in oil prices is because of a decrease in demand as the global economic crisis takes its toll on companies and factories as well as the man on the street. And as demand falls, prices will follow.
However, it was expected that once OPEC announced this cut (third one this year) prices will increase again. The cut effectively brings a total reduction in OPEC supply to 4.2 million bpd, nearly a five percent cut in world oil supplies.
The question is, why did this cut not result in the anticipated increase in prices? I am wondering if it is because the initial increase in prices were not “real”, i.e. it could have been a result of speculations which has helped bumped up the prices. And if this were true, we actually do not have any idea how much is ideal then. We have no idea how much of it were real demand and how much of it is speculated.
And because of the rise in oil prices in the past 12 months, oil producing countries have been aggressively building their budgets based on the anticipated income to fund growth projects. What will happen to these countries when oil prices continue to head downwards? How much of deficits will take place?
And lastly, does the decrease in oil prices actually have a positive effect on the consumers? When oil prices were up, the cost of it was passed on to the consumers who had to pay more for everything since energy cost were high. Now that it has fallen, I do not really feel that prices of consumables have come down significantly.
So really, how does the falling oil prices help us?
