The Economic Impact of Cheap Oil

In 2017, United States has achieved the unthinkable feat. It has become one of the largest producers of oil across the globe. Many analysts believe that the US will overtake Saudi Arabia to be the largest producer of oil in the year 2018 itself. However, America is still the largest consumer of oil across the world and even after increasing its output it is still a net importer of oil.

The world oil market was earlier a cartel formed between Oil Producing and Exploring Countries (OPEC), Russia and other non-OPEC oil producers. At its peak, they had driven oil prices as high as $150 per barrel. However, ever since private American companies discovered that oil could be produced by using the process of fracking, the supply went up. The cartel could no longer control and dominate the supply of oil across the world. As a result, the prices of oil have crashed. They are currently hovering around the $60 mark per barrel. This has affected all economies of the world.

In this article, we will have a closer look at how cheap oil has impacted the world.

Why Is Oil Getting Cheaper?

The lower price of oil is no longer a temporary phenomenon. It looks like these lower prices are here to stay. This is because traditional oil companies took years to ramp up production. However, the newer technology, i.e., fracking is much more scalable. Companies can respond to increase in supply by quickly ramping up production. This can be done in a matter of months as compared to years earlier. Because of these technological advancements and the abundance of shale oil, it is unlikely that the world will ever see a sustained shortage of oil. Hence, the price of oil is likely to continue its downward trend in the near future.

What Is The Impact?

The shale oil production is likely to become the dominant source of oil production all over the world. This is because the increased production from shale oil has the capacity to fulfill all of the world’s growing energy needs. The aggressive increase in capacity is likely to bring the price of oil down to $40 per barrel.

On the positive side, shale oil reserves are present in abundance all over the world. There are reserves is all places right from South America to Asia. However, the problem is that new supply chains will have to be developed. The very expensive infrastructure that was put in place by mega oil firms is likely to become obsolete over the next few years.

Diversification

Conventional oil and gas production is now becoming a secondary business for global oil majors such as Chevron, Texaco, and Total. Instead, all these companies are now focusing on ensuring that their shale oil production is expanded. These companies are now in the process of identifying and acquiring sites where maximum shale oil production can be achieved. The diversification efforts by major companies confirm the facts that increasing shale oil production is not a mere fad but instead a permanent trend that may be here to stay for the long term.

Also, countries are looking for new trading partners. For instance, India imports more than 80% of its fuel. Until now, they have been mostly reliant on OPEC countries. However, now they have started importing from the United States, which is alarming for the OPEC nations.

Technological Advancements

The traditional oil and gas industry is trying to undergo a digital revolution. This has become necessary to ensure that the production costs can stay competitive with the shale oil production. Automation is being implemented in a big way in this sector. Unmanned drones are being used to monitor leaking pipelines. Similarly, the usage of self-driving vehicles and other tools with artificial intelligence at these sites is increasing. The idea is to optimize production by bringing down costs. If the traditional oil and gas sector is not able to do so, their existence might come into question.

New Supply Chains

Since the costs are now drastically reducing, many countries and companies are now trying to provide better service to win over customers. One of the ways of providing this service is by ensuring timely supply of oil. This can be done by settling up refining plants at the customer’s sites. For instance, Saudi Arabia has set up refining plants in Malaysia. This also helps the local economy by providing employment to the citizens of those countries. As a result, governments become loyal customers who are willing to buy consistently. Hence, the global oil and gas supply chain is undergoing drastic changes.

The Removal of Subsidies

Lastly, the drop in the oil prices has wrecked the economies of many countries. Countries like Venezuela have gone bankrupt. On the other hand, countries like Saudi Arabia are facing financial distress. As a result, they have removed the massive subsidies that were being provided to their citizens. Now, the citizens of these nations are also paying the market price of oil. Also, many other welfare programs have been revoked as governments have come to realize that the low price of oil is here to stay!

To sum it up, the global oil and gas industry is changing at a rapid pace. From being a stable industry, it has become a center of innovation and technological advances. As a result, the prices are coming down rapidly. This is benefitting the consumers, but the producers are having a tough time.


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