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Declining Oil Prices

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Musaed Al Hajeri

on 16 November 2014

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Transcript of Declining Oil Prices

Declining Oil Prices Worldwide
Mohammed Al Mejel - Abdulaziz Al Eisa
Mansour Abouhaimed - Jafar Hayat
Nasser Al Sultan - Musaed Al Hajeri

are oil prices declining?
Negative Outcomes
- Inflation:
an increase in the general price and a decrease in the value of the dollar.
- Deflation:
a decrease in the general price and an increase in the value of the dollar.
- Crude Oil:
unrefined petroleum exported to foreign countries.
-Standard of living:
the degree of wealth and material comfort available to a person or community.
-Peak Oil:
the hypothetical point in time when the global production of oil reaches its maximum rate, after which production will gradually decline. (Might be the case currently)
General Information
The ongoing decline of crude oil prices, especially in the Gulf region as well as the Middle East countries is negatively affecting all of the economy, social status, and political stature of the individual countries that export crude oil as their main source of income.
Oil prices fell at a pace unseen since the 2008 international financial crisis with Brent crude falling below $86 per barrel. Some top oil producers in the Arab world have expressed concern that declines in the oil price could
damage their economies.
Oil prices remain dropping sharply in global markets continuously for nearly three months, influenced by several factors, most notably an
oversupply and declining economic growth
the high price of the dollar
, according to most of the economic reports.
“We are seeing a new cycle of low oil prices as a result of political and economic factors shaking the global economy and starting to negatively impact our national economy,”

-Sheikh Sabah al-Ahmad al-Sabah, in a speech to open the new parliamentary term.
Kuwait plans to invest around
to boost its oil production
capacity to
4 million
barrels per day
(bpd) by
, an executive from Kuwait’s state oil company (KOC) said on Thursday.
“There are plans to spend $40 billion to lift the capacity up to 4 million barrels a day by 2020 and maintain that figure till 2030,”
he said.
Our analysis-
This implies
that if the prices are going down, we'd be losing even more per day in comparison the prices prior to the incident.

Despite increasing tensions in the Middle East, the nationwide average for a gallon of gas stands below
for the first time in four years — a roughly
20% drop
from June levels.

General Information -continued
- OPEC, the oil-producing group that controls an estimated 40% of world supply and aims to keep oil prices as high as it can, seems to be just fine with the current price

- At a recent oil industry event in London, OPEC's
Secretary-general Abdullah al-Badri told reporters,
"If prices stay at $85, we will see a lot of investment going out of the market. About 65% of the producers have high costs. Not OPEC."

-True. Oil is cheap to secure in the Middle East. And, therein may lie the primary reason OPEC won't budge on production.
-This time around, should OPEC maintain current production levels, we should assume it is more interested in its long-term survival than in a current influx of cash.
-Many people have the impression that falling oil prices mean that the cost of production is falling, and thus that the feared “peak oil” is far in the distance. This is not the correct interpretation, especially when many types of commodities are decreasing in price at the same time. 
-Over the short term, commodity prices don’t reflect the cost of extraction; they reflect what buyers can afford.

-It is clear that oil prices will not match the cost of extraction, or the cost of extraction plus a reasonable profit, for any particular producer.

-When oil prices rose, countries using a very high
percentage of oil in their energy mix (such as the PIIGS in Europe, Japan, and United States) became less competitive in the world economy. They tended to fall behind China and India, countries that use much more coal (which is cheaper) in their energy mix.

-According to geologist Arthur Berman, the sharp gust of shale may provide the U.S. with a 14-year supply of natural gas. While this may do wonders for electricity bills, Americans will rely on Arabian oil for as long as they drive cars and fly airplanes.
-When prices are set in a world market, the big issue is affordability. Even if food, oil and coal are close to necessities, consumers can’t pay more than they can afford.
-If oil prices drop, there is a temptation to believe that this is because the cost of production has dropped. Over a long enough period, a drop in the cost of production might be expected to lead to lower oil prices.
-The expected decline in oil prices is primarily because of
geopolitical factors,

increased inventories
the negative outlook for global economic growth
, according to the Kuwaiti minister of Oil Ali Al Omair.
Against the decline of oil prices in the Gulf and the Middle East.
Geopolitical tensions:
- Insurgency in Iraq –
Islamic State in Iraq and Syria (or ISIS) threat to supplies from giant oil fields.
- Ukraine conflict involving Russia –
a major supplier of energy to the world.
- Israel-Gaza conflict –
a region that is home to the world’s largest crude oil deposits and supplies.
Due to
World economic recessions and
crude oil prices rapidly declined
by late-2008/early-2009.  This declining price trend was reversed due to improving World economies and increased demand, and a reduction in available crude oil supplies. 
Several factors resulted in falling oil prices, including:
An increase in oil production from countries outside OPEC
as a result of
a mutation of shale oil in North America and in particular the United States.
The recovery of the production of Libya,
where US crude fell by about 13%, on an annual basis.
The decline in global oil consumption to less than expected levels
because of economic data that may be harmful for the European economy and Japan, along with
The decline of geopolitical reasons in Europe and the Middle East,
the high value of the dollar,
where there is an inverse relationship between the two.
Positive Outcomes
- The situation will improve, says oil Minister Ali Al Omair.Secretary General of the Organization of Petroleum Exporting Abdullah Al-Badri said that there's nothing to fear in the markets, especially the sharp declines in oil prices in the recent period, because the situation will improve by itself.
- «OPEC does not prefer high price or a low price» because
high prices reduce demand
falling prices leads to a decline in oil production.
(Economic POV)
- Deputy Prime Minister and Minister of Trade and Industry, Dr. Abdulmohsen Al-Madj considered that the Kuwaitis will live even if the price of a barrel of oil fell to $ 30. He states that people of Kuwait were simple in the past, despite the presence of oil, but the habits changed with the change of time. (Social POV)
- The first winner is the world economy itself.
A 10%
change in the oil price is associated with around a 0.2% change in global GDP, says Tom Helbling of the IMF.
A price fall normally boosts GDP by shifting resources from producers to consumers,
who are more likely to spend their gains than wealthy sheikhdoms. (Economic POV)

- The lower oil prices may well have a very bullish effect on US
markets over the longer term. In fact, in a recent interview with CNBC, former Gulf Oil CEO Joe Petrowski estimated that
the oil price declines will save the average American $12,000 over the next  year, thanks to cheaper prices at the pump and for heating and electricity.

Ahmed al-Badri, a Kuwaiti economist, stated that
"diversification of income sources is the only strategic alternative to Kuwait to reduce dependence on oil,"
stressing that
"the transfer of stimuli from the public sector to the private sector, will reduce the rush of people to inflated salaries of government jobs"
added Badri.
"The current budget problem, lies at the door of wages and salaries and the like,"
explaining that
"citizens choose to work for the government because of the high financial advantages and the lack of existing work."

Oil importers will benefit from a falling oil price because the value of their oil imports will drop. This will reduce the current account deficit (value of goods imported exceeds value of goods exported) of oil importers;
this is important for a country like India who imports 75% of oil consumption and currently has a large current account deficit. However,
for oil exporters, a falling oil price will do the opposite reducing the value of their exports and causing lower trade surplus.
The UK is currently a small net importer of oil, so will have limited impact on UK current account.

- Low oil prices
bankrupt ISIS
and destroy one of their most influential financial resources.
- A few days earlier, ISIS claimed control of Iraq’s largest oil refinery in Baiji though this claim was in dispute.
- Ongoing conflict and crisis in the Middle East continues to drive the price of crude higher. It was only at the end of August 2013 when the U.S. government’s threats to intervene in Syria after the regime’s use of chemical weapons in its ongoing civil war drove crude prices to a seven-month high.
- America’s southern states are reaping the rewards of an oil boom and are mitigating the global crisis. Last year,
the US began to produce more oil than it imported
something that has not been accomplished in nearly twenty years.

- The introduction of
shale oil technology (process for unconventional oil extraction)
allows oil production companies to access resources they previously were unable to.
- Lower oil prices have obvious direct and indirect effects on consumer prices. But the boost to growth is more debatable, since lower oil prices involve a redistribution of income from oil producers to oil consumers. (Social- consumer loses)
- Al Mazaya Holding reported that the decline in oil prices
dramatically will have a clear impact on the Gulf spending on infrastructure, real estate and vital sectors such as education, health care, transportation and housing projects.

Extracting oil from shale is expensive.
So when the oil price drops, America is one of the places most likely to pull back (Arctic and Canadian tar-sands producers are even more vulnerable). According to Michael Cohen of Barclays, a bank,
a $20 drop in the world oil price reduces American producers’ earnings before interest by 20%
, and only four-fifths of shale reserves are economic to extract using current technology with Brent (light oil) at around $85. (Economic POV)

- The International Monetary Fund warned of the consequences of falling oil prices to $30, which
poses a real threat to the government revenues that fund most of the capital expenditure on generating economic sectors or stimulating the growth of his weakness under the major economies in Europe and America.

- "If prices remain at these lows, this may
result in a decline in U.S. upstream capital expenditures
by 10 percent in 2015, which will have implication for future production growth," Birol told Reuters at the launch of the report.

- If Saudi Arabia continues to maintain their current market share by further dropping their export oil prices other OPEC members’ economies will increasingly suffer, which could lead to an eventual breakup of the Cartel (OPEC).  If
the Saudi’s strategy is to push world market crude oil prices well below $75 per barrel through at least 2015 in order to make U.S. tight oil production uneconomic, U.S. Energy Security will suffer.
- As the cost of petroleum fuels declines the attractiveness of higher efficiency vehicles can also decline and demand for lower mileage vehicles such as SUV’s can increase.
  This Consumer behavior, possibly attributed to overall U.S. economy and jobs improvements, successful Auto Manufacturers marketing, and declining petroleum fuel prices,
could contribute to increasing Transportation Sector petroleum consumption
, which has trended up since 2012.

- For oil exporters a falling oil price is bad news. Many oil exporting countries rely on tax revenue from oil production to fund government spending. For example, Russia gains 70% of all tax revenues from oil and gas.
Falling oil prices will lead to a government budget deficit, and will require either higher taxes or government spending cuts.
Other oil exporters like Venezuela are relying on oil revenues to fund generous social spending.
A fall in oil prices could lead to a significant budget deficit and social problems.

- Some oil exporters, such as Saudi Arabia and UAE have built up substantial foreign currency reserves;
they can afford temporary falls in oil prices because they have substantial reserves.
This is why Saudi Arabia has so far not responded by cutting output.
- Hugely affect the real estate
in the gulf region in a tremendously negative way.

- Create a lower class society
in the Middle East especially on oil-dependent cities.

- Based on recent research and data, this decline in the price of oil
could lead the Middle East economy, especially the Gulf region to its least point since 50 years ago.
Works Cited
Articles For

- http://www.politico.com/magazine/story/2014/11/oil-prices-are-dropping-so-what-112607.html#.VGSXm4da_ww
- http://www.open.edu/openlearn/nature-environment/the-environment/environmental-studies/can-we-live-without-oil
- http://www.theguardian.com/money/2014/nov/10/six-reasons-crash-oil-nothing-worry
Articles Against
Other Refrences
- http://www.realclearworld.com/articles/2014/10/30/the_end_of_the_middle_east_110774.html
- http://thinkprogress.org/climate/2014/06/17/3449556/iraq-isis-oil-crisis-global/
- http://www.bloomberg.com/news/2014-11-12/shale-boom-masks-multiple-threats-to-world-oil-supply-iea-says.html
- http://www.washingtonpost.com/opinions/imagining-a-world-without-oil/2011/04/12/AFppFHKE_story.html
- http://www.wolfatthedoor.org.uk/mainpages/futures.html

- Lower oil prices help to reduce the cost of living. Oil related transport costs will directly fall, leading to lower cost of living and a lower inflation rate.
Falling oil prices is one reason behind the recent fall in UK inflation to 1.2

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