How to respond to falling oil price in global market

The price of fuel oil is in a free fall in the international market after four years of stability. Brent crude oil came below $60 a barrel in December, 2014, from $115 in June 2014.
This large fall is not 'peak oil' or peak of oil production, where peak is a situation of any maximum point leading to a decline. It was predicted that the world would reach a peak oil level in around 2010. The world's oil supply in million barrels per day increased from 85 to 93 during 2009-2014. Oil became cheap in the international market. This will be read as a year-over-year fall. Even so, a fall in price and a rise in supply in the mid-2000s have made the peak oil model questionable.
The primary theory of peak oil was given by American geophysicist King Hubbert in 1956. It was well-recognised when the USA experienced peak oil in the stipulated year of 1970. The Club of Rome came up with a report 'Limits to Growth' in 1972, which explained the peak of food and industrial output for depletion of resources. Subsequently, trends were seen to link any hike in oil price with peak oil as oil discoveries peaked in 1964 and in cases where any country stayed around peak oil. Accordingly, a prediction on 'world peak' by British petro-geologist Colin Campbell was well accepted. Because of a steady supply despite a gradual hike in prices since 2004, the limit to oil supply came into serious discussion after 2007.
Meanwhile, a few countries re-raised production after some years of their peak oil, which is similar to 'double peak oil' as stated by Mr. Hubbert. However, the world's peak oil has not yet come true because of escalation in its proven reserves by 27 per cent over the past decade.
On the other hand, the demand for oil is getting lower in many countries because of continuous switching to bio-fuel and other renewable energies. The bio-fuel appeared as a cost-efficient substitute at the time of high price of crude oil over $100 per barrel. Its production also increased from 150 to 510 million barrels oil during 2005-2013. Moreover, a massive drive is going on for the expansion of green energy across the world.
In another development, the European Union (EU) cut its daily oil consumption from 15.1 to 12.7 million barrels during 2005-2013, which had started before the global economic recession. Such a change in energy scenario would bring the crude oil below $100 per barrel, but any price below $60 was not expected. Doesn't the behaviour of oil producers have influence on the development?
The Organisation of the Petroleum Exporting Countries (OPEC) is a forum of 12 petroleum exporting countries in the world. It holds 71.9 per cent of the world's oil reserves; and includes Venezuela (17.7 per cent) and Saudi Arabia (15.6 per cent). However, Saudi Arabia alone produced one-third of OPEC total in 2013. The OPEC had a production of 37 million barrels per day equivalent to 42.1 per cent of the world total.
On the other hand, non-OPEC countries produced 41.4 per cent of the world total, of which about one-third was produced by the USA. The non-OPEC countries were to have the capacity of 1.68 million barrels in daily production against the world's incremental demand of 1.05 million barrels in 2014. Besides, the oil output of Iraq and Libya has not been reduced even after political turmoil. In addition, the Saudi-Gulf alliance has decided not to curb their productions. Against this backdrop, there is little possibility of rise in oil price soon in the international market.
Many articles in the Wall Street Journal, the Economist and other reputable newspapers have explained the geopolitics behind the cheap oil. The world's largest exporter Saudi Arabia has firmly decided not cut production at $60 per barrel though its fiscal breakeven comes at $83. On the other hand, the USA raised its oil production after 2009 and recorded the world's largest growth for the third consecutive year. The Saudi-US combine has accepted the economic pain caused by cheap oil just for creating 'pressure' on anti-West Russia and Iran.
Owing to the falling oil price, coupled with Western sanctions that hit hard the two countries, Russia and Iran need $101 and $133 per barrel respectively to attain deficit-breakeven. Yearly loss of Russia comes at $2 billion for per barrel fall of $1 because of the fact that its oil production is as large as one-eighth of world's total. Iran is also in a critical condition due to its losing more than $1.0 billion every month.
How long will this cheap-oil bomb-ticking continue is a vital question. In the meantime, all OPEC members, except Kuwait, have fallen into financial crisis. Moreover, almost all the oil-producing countries are in economic mismanagement. The USA might not last long at $65 per barrel, according to Goldman Sachs. The International Energy Agency (IEA) has forecast about a slight hike to an average price at $68 per barrel in 2015.
Despite a large fall in oil price in the international market, Bangladesh government does not want to cut the domestic price. In the past, the oil price hike in domestic market was not smooth, although it had aimed to cut subsidies. The government used to pay huge subsidies which peaked to Taka 137 billion in 2012-13. The oil price was more than Tk 10 per litre for diesel in 2012. Lately, the low-price has led the country's oil importing agency, Bangladesh Petroleum Corporation (BPC), to come out as a profit-making organisation. The profit margin from the widely consumed diesel was Tk 4 per litre in December, 2014. This is expected to rise in the coming months when this cheap oil will arrive in the country. This will enable the BPC to repay its Tk 40 billion in debt. As our finance minister considers the recent plunge in oil price as a year-over-year fall, any hike in domestic price after an interim decline might raise inflation. In this regard, non-adjustment is somewhat accepted as a short-run step.
Our oil consumption increased remarkably from 88 to 118 thousand barrels per day during 2010-2012. Of the total, one-third is used by the rental and quick-rental power plants. Since 2010 their number has increased to 26. These oil-run private plants are permitted to import oil directly. They get the benefit of international cheap oil.
On the other hand, any price-cut in the domestic market with subsidy will not be rational in this initial stage of egoistical international market. However, any consumption-cut has a multiplier negative impact on any economy. Our oil consumption decreased 1.7 per cent in 2013, which might be due to a price hike in January 2013. The domestic supply of natural gas is not adequate to supplement any large cut in oil consumption. Moreover, a high domestic price will stimulate illegal oil import. In view of this, high oil price in the country should not be prolonged alongside a very low price in the international market.

Dr. M. Aminul Islam Akanda  is Associate Professor and Chairman, Department of Economics, Comilla University.
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