What is wrong with low oil prices?

The falling prices of oil is the biggest energy news in the world and from past few months there are tons of articles published on the hot topic “Why oil prices are falling?” . I believe everyone knows now why oil prices are falling but my question to you is that what is the problem if oil prices are going down? Generally if some commodity price goes down its good for consumers as they have to pay less for that commodity.So why there is a hot debate and majority of countries are asking for higher oil prices?

 

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The plunge in oil prices is having significant economic consequences around the world. It is a boom for oil importers but a bane for oil exporters. The major affected countries are:

Russia: Russia’s situation is getting the most attention these days. The country’s is hugely dependent on oil and gas production — with oil revenues making up 45 percent of the government budget — and the sharp fall in oil prices has ruined their economy.

Economists now estimate that Russia’s GDP will shrink at least 4.5 percent in 2015 if oil prices continues to remain low for a long time. The plunging price of oil has also caused the ruble’s (Russian currency)  value to collapse — which is leading to panic inside Russia and a rise in inflation, as imports become drastically more expensive. Many Russians, worried that their savings may vanish, have been rushing out to buy cars and washing machines — anything that has more lasting value than currency.

So far, Russia’s central bank has been struggling to deal with this crisis. On December 15, 2014, the country suddenly hiked interest rates from 10.5 percent to 17 percent in an attempt to stop people from selling off rubles. But those rate hikes are likely to slow the country’s economy down even further.

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Iran: Iran’s economy had recently started to rebound after years of recession. The International Monetary Fund had been projecting that the country was on track to grow 2.3 percent next year. But that was all before oil prices started to plunge — a potentially precarious situation for the country.

One big problem for Iran is that it also needs oil prices well north of $100 per barrel to balance its budget, especially since Western sanctions have made it much harder to export crude. If oil prices keep falling, the Iranian government may need to make up revenues elsewhere — say, by paring back domestic fuel subsidies (always an unpopular move, at least in the short term).

Venezuela: There is a growing concern that the oil crash could cause Venezuela, another major oil producer, to default. The nation’s economy — heavily dependent on oil revenue — is set to shrink some 3 percent this year and inflation is rampant.

Saudi Arabia: There’s no question that Saudi Arabia, the world’s second-largest crude producer (after Russia), will suffer financially from cheap oil. If oil stays at around $60 per barrel next year, the government will run a deficit equal to 14 percent of GDP.

For now, however, the Saudis are toughing this out — and show no sign of trying to prop up prices as they have in the past. The kingdom has built up a stockpile of foreign currency worth some $750 billion, which it will use to finance its deficits. In December, the country’s oil minister, Ali al-Naimi, said he didn’t care if prices crashed to $20 or $40 per barrel, he wasn’t going to budge from his position. “It is not in the interest of OPEC producers to cut their production, whatever the price is,” he said.

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That said, if low oil prices persist, Saudi Arabia may have to cut back on some of the social programs it had instituted after the Arab Spring. And Naimi’s strategy of maintaining oil output is controversial within the kingdom. (In January 2015, Saudi King Abdullah died, but his successor Salman said he would maintain the current oil policy.)

The United States: In the US, meanwhile, a fall in crude prices will have both positive and negative impacts. For many people, it will offer an excellent economic boost: cheaper oil means lower gasoline prices — which have fallen to $2.04 per gallon, the lowest since 2009:

The US Energy Information Agency projects that US drivers will spend about $550 less on gasoline in 2015 than they did in 2014, assuming prices stay low. That will give consumers more money to spend on other things.

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Europe: With Europe’s flagging economies characterized by low inflation and weak growth, any benefits of lower prices would be welcomed by beleaguered governments.

A 10% fall in oil prices should lead to a 0.1% increase in economic output, say some. In general consumers benefit through lower energy prices, but eventually low oil prices do erode the conditions that brought them about.

China: China is set to become the largest net importer of oil, should gain from falling prices. However, lower oil prices won’t fully offset the far wider effects of a slowing economy.

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Japan: It imports nearly all of the oil it uses. But lower prices are a mixed blessing because high energy prices had helped to push inflation higher, which has been a key part of Japanese Prime Minister Shinzo Abe’s growth strategy to combat deflation.

India: It imports 75% of its oil, and analysts say falling oil prices will ease its current account deficit. At the same time, the cost of India’s fuel subsidies could fall by $2.5 billion this year – but only if oil prices stay low.

So some countries want high oil prices and some are happy from low oil prices. If the price drop lasts a long time, that could also spur people to start using more oil which will eventually increase the oil prices.The current oil price is $67 per barrel and the question arise is “Will global oil prices stay low?”.

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This is very hard to predict. If oil demand remains weak and production stays high, prices might not bounce back for some time.

But the world is full of potential surprises. Conflict could break out again in Libya or Iraq, which would hamper oil production. China’s economy could come roaring back. Europe could suddenly rebound out of its malaise. Saudi Arabia could decide that enough is enough and cut back on production all of the sudden. Any of those things could increase prices.If history is any indication, oil prices will eventually rise again, though it could take some time. And some experts think we should be preparing for that day.

 

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Harsh

Harsh is a curious writer who loves to explore his surroundings. There are many websites who provide answer to people queries but no single website alone resolves the curiosity of people. Curious Mind Box is an initiative to resolve the curiosities and answer every What, How and Why question that comes into your mind.

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