For the first time in the last 52 weeks, crude oil prices closed at a level lower than what it was a year ago. On Friday (October 10, 2008), Nymex crude futures closed at $77.61/bbl, comfortably below last year's price of $78.23/bbl. It has been a big relief to consuming nations, who have been at the mercy of the 11-member Organisation of Petroleum Exporting Countries (OPEC).
Given the momentum that falling have gathered, and given the nervousness among OPEC nations, $50/bbl oil does look like reality. Having seen oil prices touch $147.27 on July 11 this year, it is difficult to see prices head towards $50. But it seems reality will take over the speculative activity of the recent past.
The damage that just one year of high oil prices have done is, perhaps, incalculable. The global airline industry has seen nearly 30 aviation companies go bankrupt during 2008, with more casualties likely to be added to the list before the end of the year. Low fare airlines now seem to have been just a passing fad, not just in India but in several countries around the world.
The Indian airline companies are expected to end fiscal 2009 with accumulated losses of nearly Rs.9500 crore. It is seeking support from the government by way of cheaper loans.
The fuel guzzling cars seem to have become a thing of the past in the US as people are finally seeing some sense in buying smaller cars. A country that was touching nearly 17 million cars annually just about two years ago is now struggling to sell 13 million cars this year. Sales of the three leaders from Detroit - GM, Ford and Chrysler - are down nearly 30% compared to last year. The stock of General Motors (it completed 100 years last month) is now trading at a 60-year low.
European automobile companies are also facing a slowdown and, at the Paris Motor show last week, it was the hottest topic of discussion among manufacturers.
India too faced an unenviable situation when oil companies could not raise prices as they suffered losses of up to Rs.600 crore every day because they could not sell fuel prices at market prices. Banks are now refusing to lend to oil companies, which are facing acute cash crunch.
Competitiveness of economies got eroded as crude oil (and other commodities-led) inflation took centre stage for central banks around the world.
OPEC nations produce a little under 40% of the world’s production. As oil prices slip back from stratospheric levels, OPEC member nations are, predictably, desperate to hold prices. It has called an emergency meeting of OPEC members next month. There are already demands from some of the shrill voices – Iraq, Qatar, Libya and Venezuela – to cut production.
A study of the annual rise in crude oil demand in the 20 years prior to 2007 shows that demand has swung between 0.01% (in 1991) and 3.55% (in 2004). Even after the second oil shock, when prices peaked to the high 30s, there was clear drop in demand. There are now clear signs that consumers in the biggest oil market, US, are now cutting down on their fuel usage. And despite the slowdown, US consumes about 19 mn bbl/day, importing 60% of its needs, of the 87 mn bbl/day that is used globally.
Now, demand in the US has fallen by almost 800,000 bbl/day from its peak. It was difficult to rein in prices when they were on the upswing from the 2007 spike, led mostly by speculative money. There is enough evidence of demand destruction and it will now be near impossible to stop prices from falling. That is why next month’s OPEC meeting becomes so interesting. Will OPEC cut production, as some members are demanding, so that the fall in prices can be arrested?
Historically, demand for crude oil goes up and down with economic growth. With the world staring at a recession, it is unlikely that prices can be artificially held at levels that OPEC would be keen.
After the second oil shock, prices of crude oil had sunk to $10/bbl and, for several years, prices refused to go past the $20/bbl mark. While those levels appear unrealistic, as we speak to oil economists, it seems certain that just as prices were inflated on the upside, it can be fall excessively for a brief while on the downside.
And what will the impact of falling prices be here in India? Elections are round the corner and this dip in prices could not have come at a better time. India meets 70% of its crude oil needs through imports and the Petroleum Minister has said that if prices were to fall around $67/bbl, a cut in prices could be considered.
It is in no one’s interest, not even Venezuelan President Hugo Chavez, to see high oil prices.