GLOBAL OIL SUPPLY AND THE NEW REALITY – BY Dr. BOBBY SRINIVASAN AND Dr. SUDHAKAR BALACHANDRAN

December 8, 2014 | Posted by bobbysrinivasan << back to blog

Hydraulic fracturing is a relatively new procedure through which the oil contained in the shale is released at a reasonable cost. This procedure has recently helped the US to reduce its dependence of imported oil. Currently, in the US, the oil production from the shale has touched 9 million barrels a day, the highest level for many decades. Because of this, importation of oil from the OPEC countries has dropped to 40% of the total demand. Currently, the import is 2.9 million barrels a day, the lowest since May 1985. In 1988, the dependence amounted to 88% of all oil consumption. Through shale oil production, the supply of oil has gone up by nearly 80% in the last years. This increased production has clearly hurt countries such as Algeria and Libya who are counting on oil revenue to keep their country’s economy functioning. Saudi Arabia, the largest oil producer is sitting pretty on the driver’s seat with no intention to reduce its production. As they say “this time it is different” and so Saudi Arabia needs all the revenue to keep up its promises to its citizens and so cannot afford to reduce production.

At the peak, the Gulf nation supplied 894,000 barrels per day. Now the current situation is different and the game Kuwait Iraq are pumping more oil to the US plan has changed while UAE, Qatar and Iran are losing out their markets. Nigeria is equally hit hard because of this oil production from shale.

Now, the global supply of crude oil increased tremendously, thanks to this US shale production. In the meanwhile, the global demand is dropping to marginally lower levels. This is primarily because both the Chinese and the Japanese economies are slowing down. They import almost 100% of their needs. The current price of Brent crude is $73 per barrel and the west Texas intermediary is $70. This price is a rude awakening to the oil producers who expected a minimum price of $100, and delightful news for countries like India, China and Japan.

What will be the impact of this declining oil prices to the global economy. First will be the disappearance of liquidity in the oil producing countries. What will happen? This will affect:

The internal consumption and the external demand for goods and services which will go down significantly.
Search for new oil will stop since the cost of finding and producing it may exceed the potential revenue that it may bring.
Possible social unrest in oil producing countries as unemployment may increase in them. For several million Indians who are living in the Middle East, it may mean loss of jobs.

For the speculators, it is a fortune to be made. Selling the oil futures for future months and hoping to buy them back cheaper can result in big gains. In fact, there is a possibility even though the probability is small. The oil futures could be pushed to lower levels, possibly to the mid $50. This will create intense competition among the oil producers to flood the market as they need the revenue. When this happens as usual the economists will claim that the oil market balloon got burst. Let us wait and see as to how the oil market will pan out.

<< back to blog

About Us

TERM ZERO

Media

Rankings

Accreditations

NIRF

Campus

Blog

Annual Events

Full Time Programs

PGPM

PGDM

EXECUTIVE EDUCATION

Corporate Programs

PGXPM

PGPM Flex

MBA in Business Analytics

Family Enterprises Management

Ranked 6 ^th

Faculty

Research

Centers of Excellence

Conferences

Campus Recruitment

Internships

Placement Reports

Leadership Series

Talent Listings

Ranked 6 th

Ranked 6 ^th