The Fall and Fall of Oil Price
T
Mukhopadhyay
30 November 2014
Recent
slashing of petrol and diesel prices in India may have helped Modi Government
in curbing inflation, but the E&P companies are not so gung-ho about this.
They have reasons not to. This affects their revenue, directly.
Gradual
removal of oil-subsidies by the Government of India has made the fuel price in
India more directly linked to the world crude oil price. It is a different
matter that the bus and taxi fares have only one way movement – upwards.
Today,
India has to import approximately 80% of its petroleum and petroleum products.
Hitherto, because of various subsidies, the price of petrol, diesel, LPG,
kerosene etc. was protected by the government from the international crude
price fluctuations. Even now, save for petrol and diesel, some of the subsidies
are still in place.
Subsidy
on petrol was removed in 2010, and the price was de-controlled by the
Government. Then in October, same year, diesel price was de-regulated. This
meant that from then on, one had to shell out more money for petrol and diesel
as the import bill went up, and vice-versa.
As
ill luck would have it, after the deregulation – a wrongly timed initiative by
the erstwhile UPA government – the international crude price saw an up-rise,
increasing the burden on import bill. Fuel prices spiraled upwards, and with it
the burden on common people.
The
oil import bill also had effects on prices of other products like paint,
rubber, plastic, polymers etc.
Then
in 2014, within six months of the Modi Government assuming power, the world
crude oil price started to plummet. In June 2014, the crude price in
international market was $115 to a barrel. Today it is only $72 to a barrel,
which means in a mere 5 months, the price has come down by a whopping 37%.
As
per experts, the oil price is slated to reach $65 per barrel in not too distant
future! And, if indeed that happens, petrol will trade at Rs 60 per liter and
diesel Rs 45 per liter. Wow!
However,
other than the international crude oil price, one more factor that determines
the petrol and diesel price is the strengthening or weakening of INR. The crude
import bill goes down when INR gains strength and vice versa. Analysis done by
the Petroleum Planning and Analysis Cell – a department under the Ministry of
Petroleum and Natural Gas – reports that with every dollar decrease in
international crude price the oil import
bill comes down by approximately 8350 crore rupees. And if INR becomes stronger
by a rupee, the import bill comes down by 10300 crore rupees. So the dynamics
is complex. Reduction of international crude prices may not necessarily
guarantee a reduction in fuel prices. But thankfully, this year that is not
happening.
Incidentally,
one major factor in the strengthening or weakening of INR is the ex-im bills.
Lesser the import bill, happier is the Rupee.
It
is expected that the oil price will retain its downward trend for a while. To
understand why, we have to briefly delve into history.
Till
1960 (from 1940 to 1960 to be precise), the international
oil market was dominated and controlled by the “Seven Sisters” (seven multinational
companies) and was largely separate from that of the former Soviet Union (FSU)
and other centrally planned economies (CPEs). The group comprised Anglo-Persian Oil
Company (now BP); Gulf Oil, Standard Oil of
California (SoCal), Texaco (now Chevron); Royal Dutch Shell; Standard Oil of New
Jersey (Esso) and Standard Oil Company
of New York (Socony) (now ExxonMobil). Of these seven companies, six belonged to the
US of A.
To break the dominance of the
“Seven Sisters” – Organization of the Petroleum Exporting Countries (OPEC) was
formed in 1960 at the Baghdad Conference on September 10–14, by 5 nations,
namely Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The five Founding
Members were later joined by nine other Members: Qatar (1961); Indonesia (1962)
– suspended its membership from January 2009; Libya (1962); United Arab
Emirates (1967); Algeria (1969); Nigeria (1971); Ecuador (1973) – suspended its
membership from December 1992-October 2007; Angola (2007) and Gabon
(1975–1994). OPEC had its headquarters in Geneva, Switzerland, in the first
five years of its existence. This was moved to Vienna, Austria, on September 1,
1965.
The modus operandi of OPEC was
simple: United, they would regulate the world crude oil production thereby
controlling the world crude oil price. OPEC was successful in their mission in
the seventies, by assuming 54% control over world crude price. But in the
nineties, OPEC started losing their foothold.
In 1990, Iran and Iraq, decided
to sell their crude in the Euros instead of USD. Pundits say, this was one very
attributable reason for the Gulf War in the pretext of non-existent Nuclear
Weaponry in Iraq. But that is a different story altogether, out of today’s
context. This propelled USA – the biggest importer of crude despite their huge
reserves - to wake up and look for alternate resources of crude oil, because
suddenly, major chunk of the crude from Iraq and Iran started siphoning off
elsewhere – in the Euro market!
From 2008, US started research
on exploiting ‘shale-oil’ and Canada started producing from the oil-sands.
Then, in 2011, commercial
shale-oil production in the US brought a revolution in the history of oil
exploitation. A thoroughly unconventional process of tapping the ‘solid’ crude
trapped in layers of impervious shale! (Kerogen or ‘solid’ crude is a naturally occurring, solid,
insoluble organic matter that occurs in shale layers and can yield oil upon
heating – a process known as Pyrolysis).
Commercial
production of shale oil boosted US domestic oil production to over 11 million
barrel per day, which is almost same as that of Saudi Arabia’s production (11.7
million barrel per day). Now, US policy prevents export of its domestic produce
of unrefined oil. Hence US – hitherto one of the biggest crude importers – has
cut down its oil import from 100 lakh barrel per day in 2010 to about 60 lakh
barrel per day as of now.
So
far, US were the biggest customer of Saudi crude – the biggest reason for the
strong political bonding between US and Saudi. Suddenly Saudi lost this market
– leaving them no alternative than to reduce price and sell it elsewhere…
Coincidentally,
there were economic slowdowns in countries like India, China, Japan and South
Korea, which had to cut down oil imports. So it became ‘oil oil everywhere – no
buyers’. One does not have to be an economic-wizard to understand that Supply
outgrew Demand!
This
fueled the fall of fuel prices…
What
makes the current ‘fall’ different from the previous ones is, whenever there
was a fall in oil price before, OPEC controlled its production to regulate it.
But last Thursday (27 November 2014) – in the OPEC conference in Vienna – there
was a clear difference in opinion amongst the members. Five Gulf Nations,
spearheaded by Saudi Arabia opposed the deregulation. Please be advised that
over 50% of OPEC production comes from these five brother-nations…
The
moment the news of OPEC talks – or the failure of it - broke out, crude price
plummeted further to 71.12 dollars to a barrel!
Saudi
Arabia along with the other four Gulf Nations, clearly wants to break the
dominance of the effect of US shale-oil. Production cost for shale-oil is high.
Once the crude price falls below 75 dollars, shale-oil production will become
economically unviable. And there lies the game! Saudi and its blood brothers
are trying their best to flood the market with crude and force US to cut down
its shale-oil produce.
US
oil companies, collectively, have invested over 1500 billion dollars for
producing shale-oil. And all this money has come from public equities and
bonds. So naturally, the oil companies, with so much at stake, can ill afford
to reduce production of shale-oil.
There
is enough masala in this game for Obama government to lose sleep on…
Meanwhile,
the rest of the world can enjoy the fall and fall of oil prices…trend is not
going to change in a hurry.
Bibliograph:
1)
Google
2)
Newspapers.
3) Internet – what
else…
