Home' Trinidad and Tobago Guardian : January 1st 2015 Contents JANUARY 2015 • WEEK ONE www.guardian.co.tt BUSINESS GUARDIAN
ENERGY | BG9
For the first half of 2014 the
oil market looked just as it
had the year before and the
two years before that. Oil
was over US$100 and driv-
ers in the US were paying
around US$3.50 for gaso-
Economies around the world seemed to
have adjusted to higher priced oil and oil com-
panies were using high profits and debt from
willing lenders to scour the world for new
There was no real hope or expectation that
U.S. drivers would see a price at the pump
that started with a US$2 ever again.
Then, despite intense turmoil in the Middle
East and an improving economy in the US---
things that have historically sent oil prices
soaring---the price of oil went into a nosedive.
In the second half of 2014, it dropped by half,
to depths not seen since May of 2009 when
the US was in the Great Recession. By Decem-
ber, some drivers even saw a price at the pump
that started with a US$1.
Oil reached a high for the year of US$107
in late June after Islamic State fighters in Iraq
seemed poised to threaten Iraq s southern oil
fields and disrupt supplies from OPEC s second
largest exporter. Then, as Islamic State s
advance was halted, and Libya ramped up its
production, oil began to drift lower.
Oil slipped further in the fall as signs
emerged that global demand was weakening.
The plunge accelerated in late November when
OPEC decided to keep producing the same
amount of oil despite the low demand.
WHY IT HAPPENED
Oil production in the US, Canada, Iraq and
elsewhere had been climbing for several years,
but rising demand in China and other devel-
oping nations along with sporadic outages
around the world kept supply and demand in
The price of oil remained remarkably steady,
near US$100 a barrel, for nearly four years.
But US oil production surged far beyond what
even the most optimistic forecasts predicted.
By the end of 2014, US drillers were producing
nine million barrels of oil per day, up 80 per
cent since 2008 and the most in three decades.
At the same time, growth in demand for
oil began to weaken. China, the biggest single
source of oil demand growth in recent years,
saw its economic expansion begin to slow.
Japan slipped deeper into recession and West-
ern Europe s economic struggles continued.
The US economy---the world s biggest oil con-
sumer---grew nearly 4.0 per cent over the
summer, but efficiency measures and changing
demographics in the U.S. are reducing demand
With rising global supplies and weak
demand, prices dropped.
Drivers, shippers, airlines and other con-
sumers of fuel around the world are benefiting
from sharply lower prices, and importing coun-
tries are benefiting from improving trade bal-
US drivers are paying US$2.38 a gallon for
gasoline on average, the lowest since May of
2009. A typical household will save US$550
over the course of the next year because of
Diesel and jet fuel prices have also plunged,
helping boost the profits and share prices of
airlines and shippers. The Dow Jones Trans-
portation Index was up 23 percent through
late December, compared with a 13 per cent
gain for the broader US market.
For oil companies, oil-producing states, and
oil-exporting countries the oil price plunge
has been excruciating.
Oil companies generally continue to produce
oil from wells they ve already drilled when
prices fall. But sharply lower revenue forces
them to cut spending on new exploration proj-
ects, makes it harder for them to raise money,
and worries lenders and investors that they
won t be able to pay off debt. BP announced
last week efforts to trim US$1 billion in spend-
ing next year. Analysts say that could result
in thousands of job cuts.
States that rely on taxes from energy pro-
duction such as Alaska, North Dakota, Okla-
homa and Texas will see lower revenues and
some have already trimmed budgets. Major
oil exporters such as Iran, Iraq, Russia and
Venezuela rely heavily on revenues from state-
owned oil companies to run their governments
and are struggling under major budget short-
The past year is a reminder that predicting
the price of oil is all but impossible, but global
supply and demand balances point to low
prices sticking around.
OPEC, for example, expects the world to
need 28.9 million barrels of its oil per day next
year---yet production target is 30 million barrels
per day. More oil on the market than consumers
demand is a recipe for low prices.
A weak global economy would reduce
demand still further, and create an even bigger
oversupply of oil. An improving global econ-
omy---perhaps helped by the strengthening
US economy---could push demand higher, and
sop up some of the excess supply of oil.
And lower prices will force investor-owned
drillers to cut spending to protect profits,
which will eventually reduce output. OPEC
also could decide to trim production, either
officially or unofficially, to prevent further
price declines. AP
of the year:
Oil at US$60
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