Future fixing of oil prices: Saudi’s clout By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

March 24, 2016 | Posted by bobbysrinivasan << back to blog

Long gone are the days when the entire world looked with great anxiety to the Saudi government in the fixing of oil prices. Being the largest producer then any decision they made had a deep impact on oil prices and they being the swing producer could call the shots. Now there are 23 countries producing oil including the US with its Shale oil and Canada from its tout sands. This is a discussion between a student and his professor.

Student: The global oil market is in turbulence in the recent days. The WTI crude oil price dropped to 26 % a barrel to $ 37 per barrels today where is this heading?

Professor: Saudi Arabia believed that maintaining their current level of oil supply of around 10 million barrels a day. They could break the Shale-oil competition from the US. Not to be left behind the US oil industry is pumping more than 10 million barrels a day. This is a situation of not necessarily perfect competition but each oil production country is doing its best to get as much of oil to the market. They are all worried that the inventory they carry may fetch them even lower prices with solar energy which is a substitute is getting lower. Now they need to accommodate Iran which is capable of adding 400000 barrels per day to the global supply.

Student: What exactly is the level of global surplus now and why?

Professor: First, let us address the why? Eurozone and Japan are all into deep recession with negative interest rates. Their oil consumption has come down significantly. To make matters worse Chinese GDP growth rate is heading lower with consumption weakening. All combined there is 3 million barrels of extra production every day. It is not clear how all these things will pan out in the future. Nigeria is so hard pressed for pressed for dollar to add to their reserves. Their currency Naira is selling in the black market for 370 to a dollar. Azerbaijan which counts so much in oil revalue has seen their currency collapse to be in line with the crushed Russian rouble.

Student: Where and when do you think this crisis will end?

Professor: Definitely not in the near term. The oil countries should sit together and work out a compromise production plan. At the moment it is not happening. Second the global economies should pick up to consume this excessive oil production. The current oil inventory level should come down. It is no more leadership problem but work out a compromise to bring the total production in line with demand. This involves budget expenditure sacrifices among the oil producing countries. Finally the global economy must pick up creating a higher consumer demand. Unless some or all these problems are addressed the oil price will continue to be volatile and probably stay in this price range.

Student: Thanks Professor.

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