An Insight: Crude Oil and World Economy

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Crude Oil

Crude Oil also known as black gold plays a huge role in world economic affairs. Most of us are clueless about how oil prices affect country’s economy;  what factors accelerate/decelerate oil prices. Here is a brief insight into Crude Oil economics.

BASICS

From early 1900’s, dependence on oil and oil based products (petroleum, gasoline, paraffin, natural gas etc.) increased with rapid industrialization, large-scale manufacturing, consumer utilization in developed and developing nations. This generated a huge demand for Crude oil in the world market.

Middle East countries(Saudi Arabia, UAE, Kuwait, Libya), Russia & USA which have rich fossil fuel deposits began extracting and producing crude oil for world market.

DEMAND AND SUPPLY

With technological driven advancements and sophistication in human life, oils became major source of energy consumption. Almost all nations’ economy and infrastructure is highly dependent on oil and majority of nations which lack oil deposits import crude oil for its development. This led to increase in demand for crude oil.

Oil exporting countries began large scale extraction and production of crude oil to meet global demands. Of all oil producing countries, Saudi Arabia is the largest producer and exporter of crude oil closely followed by Russia and USA.

HISTORY OF OIL PRICES FROM 2000’S

From 1999 to 2008, oil prices increased significantly reaching up to $145/barrel in July 2008 due to large scale demand from countries like India and China. During 2008 economic crisis, the prices fell a all-time low of $30/barrel in December 2008. The oil prices rebounded after economic crisis as developed countries like USA, developing countries like India, China were still in large need of oil. The rising political instability in the Middle East, with large scale demands and concerns regarding supply, the prices of crude oil surged to $110/barrel by mid 2013.

REASONS : OIL PRICE REDUCTION (2014 – Present)

To develop self-dependency and gain an upper hand in global oil market, United States began mass-production of Crude oil from Shale formations by process known as fracturing. Saudi Arabia, the world largest exporter, alarmed by the situation began producing more oil to secure its hold in oil exports. Meanwhile, Russia whose 80% economy is dependent on oil exports too started producing more oil to improve their weakened economy.

At the same time, slowdown of China’s economy coupled with Euro zone crisis led to reduced demand of Crude oil during the last couple of years. By mid-2014, with a reduced demand coupled with large availability of oil supplies the reduction in oil prices became inevitable.

CURRENT SITUATION AND FUTURE

As per research analysts, the prices of Crude oil may still weaken due to the following factors

Little signs of stabilization of Chinese economy in near future.

With huge billions of foreign reserves to handle deficits for the next couple of years, Saudi Arabia won’t yield to reduce its oil production as it gives USA, an upper hand in oil related affairs which they can’t afford to.

US based oil companies are under pressure to produce more oil to handle their past production deficits.

With no positive signals in Russian economy, there are no signs of reduction in oil production.

WHAT’S IN STORE FOR INDIA?

India is one of the largest importers of oil. Almost 80% of nation’s oil needs are imported. Therefore, reduction in oil prices will play a key role and provide us opportunities for stabilizing our economy.

Though the fall in crude oil prices doesn’t affect the citizens immediately, it narrows the losses faced by Petroleum producers. This in turn reduces the oil subsides by given by government reducing India’s fiscal deficit (Amount in foreign currency India owes to the world). Future reductions in oil prices might benefit tax payers with more subsidized rates for petrol, diesel and natural gas.

USEFUL LINKS: Current Crude Oil Prices | Previous Crude Oil Prices | History of Oil Prices | 2008 Financial Crisis

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