INDIVIDUAL PROJECT: OIL PRICES CASE - Report Three
ECO 100 – Introduction to Economics
REPORT THREE
Introduction
Oil is one of the fundamental strategic forms of energy that influence the development of industries and economies (Yan 2012). Its significance in stimulating economic growth and development has increased the level of interest by different groups across the world. As a result of this aspect, the oil market segment is characterized by major price swings. Lee and Huh (2017) assert that oil price fluctuations may impact a country’s economic sustainability and stability. The degree of impact is relatively high in oil-importing countries. Fluctuations in oil prices are triggered by different factors such as supply disruptions, global demand, and precautionary motives (Caldara, Cavallo & Iacoviello 2017). Traditionally, oil price fluctuations were largely associated with a disruption in the flow of global oil production as a result of political events such as revolutions and war (Sanders, Boris K & Manfredo 2004). Yan (2012) asserts that ‘the yearly consumption of oil occupies about 40% of total consumption of global energy’ (p.39).
Oil price fluctuation has been a recurrent economic event over the years. The 1973/1974 oil crisis is one of the notable major economic events that were characterized by a substantial decline in oil prices. The 1973/1974 oil crisis was triggered by a decline in oil supply hence leading to an increase in oil prices (Baumeister & Kilian 2012). Similarly, the 21st century has also been characterized by events of oil price fluctuations. For example, in 2000, the oil price was estimated to be $25 per barrel. This price remained relatively stable until 20003. However, the price increased significantly to $145 per barrel in 2008 (Fowowe 2014). The increase in oil prices is attributed to an increase in the level of speculation in the oil futures market (Tornell & Yuan 2012). This paper examines oil price fluctuation from 2012 until the end of 2016. The paper further provides a prediction of oil prices for the next five years, 2017-2022.
Oil price fluctuation from 2012 to 2016
Oil prices are subject to different economic and geopolitical factors (The Oxford Institute for Energy Studies 2016). Oil prices experienced significant fluctuation between 2012 and 2016. Between March 2012 and June 2012, the price declined from $117.79 per barrel to $90 per barrel, which represents a decline of 23.60%. However, the price increased to $101.17 per barrel in December 2012 (Index Mundi 2017). The report by Bloomberg further asserts that the decline in oil prices experienced in 2012 can be attributed to a decline in oil demand globally (Philips 2012). By December 2011, global oil consumption declined to 88.5 million barrels per day down from a high of 90.4 million barrels per day recorded in April 2011. The decline in demand for oil was carried over to 2012. The decline in oil prices in 2012 is attributed to an increase in the volume of oil produced globally (Philips 2012). New oil finds and application of new drilling techniques in North America coupled with a 10% increase in the volume of oil produced by the Oil Producing and Exporting Countries (OPEC) (Philips 2012). The invention of new and low-cost oil exploration and extraction techniques significantly contributed to a decline in oil prices. For example, shale oil producers in the United States made oil production more efficient (Amadeo 2017). However, between 2013 and mid-2014, the global oil price was relatively stable. The global oil price in January 2013 was $105.04 per barrel but increased slightly to $ 108.37 per barrel in June 2014. The stability in oil prices experienced between 2013 and 2014 arose from an increase in the volume of oil production from the United States and OPEC member states. In 2013 and 2014, alternative fuel and shale oil producers in the United States increased to 9.4 million barrels per day, which was the highest volume of oil produced per day since the 9.6 million barrels per day produced in 1970 (Amadeo 2017). Lee and Huh (2017) assert that OPEC’s decision not to curtail the production of oil by member states triggered a sharp decline in oil prices in 2014 and 2015. This view is supported by Husain (2015) et al. who affirm that higher oil production was experienced in major OPEC member countries such as Libya, Saudi Arabia, and Iraq. During this period, the demand for oil in major oil-importing countries in Europe and Asia was relatively weak. The increase in oil supply against relatively stable demand for oil contributed to the price stability experienced (US Energy Information Administration 2013).
In spite of the stability experienced, global oil prices declined significantly between June 2014 and 2015. During this period, the global oil price declined from $108.37 per barrel in June 2014 to a low of $47.45 per barrel. The price increased slightly to $ 62.5 per barrel in May 2015 before falling to its lowest point of $ 29.92 in January 2016. However, in 2016, the global oil price has been on an upward trajectory, which is evidenced by the increase in oil price per barrel to $52.61 by the end of December 2016 (Index Mundi 2017). Graph 1 and Appendix 1 illustrate the trend of oil prices between 2012 and the end of 2016.
Prediction of oil prices [2017-2022]
Global oil prices have been on a rebound from the end of 2016, which is evidenced by the upward trend in oil prices in spite of the slight fluctuations experienced One of the factors that have contributed to the increase in oil price from the 12-year low of $46.99 in December reduction in the volume of oil production by OPEC member states during the fourth quarter of 2016 (Deloitte 2017). In 2017, the demand for oil will outweigh the supply hence leading to an increase in spot oil prices. The projected increase in global oil prices for the period ranging between 2017 and 2022 is further supported by a report by World Bank which forecasts that the global oil price will increase steadily as illustrated by Table 2. In 2017, the average price per barrel is expected to be $55 which will increase to $60 per barrel.
|
Year |
Projected global oil prices per barrel in $ |
|
2017 |
55 |
|
2018 |
60 |
|
2019 |
61.5 |
|
2020 |
62.9 |
|
2021 |
64.5 |
|
2022 |
66 |
Table 1
One of the factors that will trigger an increase in global oil prices entails a reduction in new oil production projects in non-OPEC countries (Rapier 2017). A report by Deloitte MarketPoint Analysis shows that 2017 will be characterized by the highest number of new oil production projects. However, the number of new oil production projects will decline from 2018 through 2022. The decline in the volume of oil production within the non-OPEC member states will lead to a decline in the global oil supply previously experienced. Apart from the decline in the supply of oil, it is expected that there will be a steady increase in demand for oil in both Organization of Economic Development Countries (OCED) and non-OECD countries. Table 3 and graph 3 illustrate the projected increase in demand for oil in the non-OECD and OECD countries.
|
Year |
||||||
|
Country |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|
Non-OECD |
49.3 |
50.1 |
50.8 |
51.6 |
52.2 |
53.2 |
|
OECD |
46.6 |
46.8 |
46.9 |
47 |
48.1 |
49.2 |
Table 3
The steady increase in demand for oil coupled with the subsequent decline in supply in the short term will lead to an increase in oil prices.
Conclusion
The global oil market is characterized by a high degree of volatility, which is evidenced by fluctuations in global oil prices. Fluctuation in oil prices is triggered by a myriad of factors such as changes in the levels of demand and supply as evidenced during the period ranging from 2012 to 2016. During this period, global oil prices were characterized by varying rates of fluctuations. A slight fluctuation was experienced between 2012 and 2014. However, between 2014 and 2015, global oil prices declined sharply due to an increase in the supply of oil as a result of an increase in the rate of oil production. The increase in oil supply was a result of the invention of new oil extraction techniques in the United States and the decision by OPEC to eliminate oil production quotas. The price decline was further increased by a decline in demand for oil especially in major oil-consuming economies such as the European and Asian countries. However, by the end of 2016, global oil prices were on an upward trajectory as a result of the decline in the volume of oil production. The expected decline in the volume of oil produced globally coupled with the subsequent increase in global oil demand is expected to contribute to an increase in the price of oil globally as illustrated by the global oil price projections between 2017 and 2022.
References
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