Why is oil price decreasing?

101 of international oil market scenario

    The oil market is perhaps the biggest industry in world, in this blog post we will know what is leading to the fall in oil prices, some people say its the Modi government which has led to decrease in oil prices, but as we all know, fortune favors the brave, and as long as the general public is benefiting, we really don't care whats leading to the benefit. But its important to know these things, i am explaining it in very simple and basic terms so whatever you do, you will understand why are oil prices coming down.

 In June 2014, oil prices were USD $115/ barrel, which has come down to USD $49/ barrel in Jan 2015.

First lets understand what led to the drastic increase in the oil prices,

• Extremely high consumption in USA and China
• Conflict in Iraq

Thus, Supply couldn't meet demand which lead to increase in price. Very simple way to understand this, if China needs more and more fuel, and OPEC (Organization of Petrol Exporting Countries - a group of countries who produce max oil in world) cannot supply, this will make OPEC in bargaining power and they can put terms as per their wish.          

Lets understand this in a simple way: 

Suppose there are 100 flats in a building and dre is only one vegetable seller, the seller will quote whatever price he wants and nobody can say or do anything, also every flat needs 10 units of veggies daily, which leads to total demand of 1000 units of consumption daily but he can supply only 800 units daily, so the ball is in sellers court as he will sell to whom he wants and at what price he wants, Similarly, the veggie seller is OPEC and flats is the rest of the world.

And as far as conflict in Iraq is concerned, every nation needs money to buy military materials specially if its in war since a decade now.And petroleum is the major source of that money thus whenever there is a major crisis in Gulf, oil price increase.

NOW LETS SEE WHY ARE PRICES COMING DOWN:

• US and Canada have begun drilling in new oil fields in North Dakota and Texas region, this maybe the result of an imaginary pipeline that they have been building from Iraq since the time of Saddam Hussain or suddenly they have discovered new oil fields, whatever the reason might be, earlier if USA needed for example 10 ltrs daily, they had to buy from OPEC, now 8 of 10 ltrs they are managing on their own.
• China is in process of an economic turmoil and most of the cities have decreased their oil consumption due to weakening economies, (google: Ghost cities in China).
• Major part of Europe is also going through a rough time as far as national economic growth is concerned, Also another major factor is new, alternative and more efficient measures like Solar or Hybrid vehicles

              So whats happening now is Supply is huge and same as it has always been, but the Demand has come down, which leads to a lot of unused stock piling up everyday. Thus the prices are coming down, and to make matters worst, OPEC isn't willing to cut production, specially Saudi Arabia which has the majority stake in OPEC isn't willing to cut production as they are afraid of loosing market share, Also in the last OPEC meet, the petroleum minister of Saudi Arabia have confessed that they have USD $750 billion dollars of cash reserve and they wont cut production even if the prices come down to as low as US $20/ barrel.

             So, i hope this information was useful, do leave feedback if possible, this blog will be more frequent now and we will discuss more such topics and will make it more easy for everyone to understand such complex topics with much ease.

cheers,

Akash Poddar