Did anyone ever dream about oil prices crashing to $57 a barrel? But it happened. Last June the price was $115 to a barrel. Then it went down to $100 and again to $80 nobody expected a crash to such abysmal levels. Even those who predicted the price of $70 were left incredulous when oil price hit $57 a barrel.
When OPEC leaders met, everyone expected a cut in oil production so that prices could pick up. But the Saudi Sheikhs refused to cut production. When it comes to anything concerning oil, it's the Saudi Sheikhs who call the shots as no other Arab country produces anywhere near 10 million barrel per day as Saudi does.
But then, the US has scaled up shale gas production to the tune of 9 million barrels per day, just one million barrel short of Saudi's production. US has also dug 20,000 shale gas wells in states like North Dakota and Texas. Saudi has only about 2,000 oil wells. Shale gas wells are easier to make with new technology of Fracking, in which a high pressure jet of water, sand and chemicals is used to break the rock surface to release the gas trapped inside. A well takes only about a week. But oil wells in the desert take more time and money to drill.
In fact in US, shale gas is the new gold rush. Just like in the first gold rush, in which people flocked to the gold mines of California, now investors are rushing to cash in on the shale gas boom. US has almost become self sufficient in carbon fuel. The loss of the US market was a very big blow to the oil sheikhs enriched by the petro dollars. Now with Chinese economy slowing down, with growth in oil demand at zero per cent, OPEC is facing a double blow. Many other countries are trying out their luck in shale gas too.
The Sheikhs realised the danger behind a high oil price and the growth of shale gas. The only way to send shale gas investors out of business, is to make production no longer profitable. Shale gas needed $70 to a barrel to make profit in the beginning. Now with advanced technology, just $ 57 will break even. No wonder petroleum prices has bottomed to that level. Now shale gas production is no longer profitable. But with bank loan liabilities pending, many shale gas companies could go bankrupt now. Exactly what the Sheikhs want. Once new investment in Shale gas dries up, oil prices could go up too. This is the grand strategy.
But then the whole world now stands to benefit from lower oil prices. If the money you spend every month to buy fuel is halved, then where will the savings go? In to the market again. When the amount of your disposable money increases, you buy more food, meat, fish, cosmetics, gadgets... just about anything and it increases your country's GDP. When oil price decreases the import bill of every country diminishes. This decreases their current account deficit, which is the difference between export and import bills. As the economy flourishes, inflation comes down. Hence interest rates come down. With more credit at lesser interest is available, investment increases. More jobs are created. This is the cascade effect of the fall in oil price.
In the tug of war between the shale and Sheikh, who will win? Or in the tussle between Saudi and the US who will have the last laugh? Keep watching this space.
Last post. But then there are two countries stuck in this war. Russia and Venezuela. with oil prices hitting rock-bottom, these oil producing and exporting countries are losing billions. Venezuela could go bankrupt and default on international debt. With the rouble crashing against the dollar, Putin is facing a loss of power that could seriously jeopardise his expansionist ambitions. Good.