Oil prices have dropped more than 20 percent since June. Brent oil, the global benchmark, has fallen to an almost four-year low of $88.05/barrel on Tuesday (14 October).
Why is oil getting cheaper despite the Middle East going to hell in a hand basket? Unsurprisingly, it’s a matter of supply versus demand.
A world awash in oil
The meteoric rise of US shale gas production has severely diminished oil cartel OPEC’s ability to set prices. US oil production (8.4-million barrels/day) looks set to surpass the output from Saudi Arabia (9.9-million barrels/day) and Russia (10.9-million barrels/day) in a few short years. US law doesn’t permit crude oil exports but booming local production has slashed US demand for oil from elsewhere, keeping prices well down.
OPEC produces a third of the world’s oil and production has, according to a Reuters survey, reached its highest level (31.06-million barrels/day) in two years, mainly due to long-lost Libyan production coming back online. Members Iraq, Nigeria, Angola and Saudi Arabia have also increased production.
All this new oil production is flooding the market and driving prices down.
Demand? What demand?
The most oil addicted nation in the world, the US, is cutting back. Consumption has fallen from about 21-million barrels/day prior to the last recession to about 18.6-million barrels/day. After peaking two decades ago, the EU’s oil demand has fallen in each of the last five years. Economic growth in China has come down from double digits at the start of the decade to about 7.5 percent, the lowest growth since the late 90s. Germany, previously the star performer in an otherwise weak Europe, is teetering on the brink of recession.
The International Energy Agency, the U.S. Energy Information Agency and even OPEC have cut global oil demand forecasts.
Why petrol will be cheaper by Christmas
The petrol price is, largely, a factor of the oil price and the rand/dollar exchange rate.
According to the International Energy Agency, demand for oil in 2015 will grow at a rate much slower than previously forecast.
The IEA expects global economies to remain weak and for oil prices to continue their downward trend for as long as OPEC fails to slash supplies. According to IEA Chief Analyst Antoine Half, OPEC may not be able to do much anyways as the market has been transformed by the US shale oil boom.
In other words, expect cheaper fuel by Christmas if the rand holds or even if it doesn’t depreciate by much.
On the other hand…
The world can change in a heartbeat. Don’t bet your house on these admittedly confident predictions. New wars may break out or some unknown factor could threaten this rosy outlook. And there’s always our shaky currency to contend with.
Kabous le Roux is a financial journalist and digital content producer at Primedia Broadcasting. He cut his teeth at iafrica.com where he was the Personal Finance, Property and Business Editor. Kabous has a passion for making complex ideas broadly accessible.
UPDATE: Also listen to this interview (31 October 2014) with Jeremy Wakeford from the Association for the Study of Peak Oil South Africa (ASPO South Africa).