The world is literally drowning in an ocean of oil

The history of oil industry is bedecked with booms and busts. Now the history is witnessing its deepest downturn.
Companies associated with oil exploration and digging all along have made record profits. Now the same companies are decommissioning most of their rigs and cutting investments in both exploration and production. An estimated 250,000 oil workers have lost their jobs around the world.
Why? The answer is simple. The price of a barrel of oil has plunged from USD 110 a barrel to, at one point, USD 27 in a span of one and a half years. Brent crude, the main international benchmark, was trading at around $32 a barrel on Friday. The price has been cut roughly by more than 60 per cent since June 2014.
In Maryland, as elsewhere in the United States, prices of gasoline, diesel, heating oil, and natural gas have dropped dramatically. One can buy a gallon of regular gas (petrol) for as low as 1 dollar 62 cents. Households that use heating oil to warm their homes are also saving money. Lower-income groups in America are being immensely benefited, because fuel costs eat up a large share of their limited earnings.
It will undoubtedly be a couple of years before oil returns to $100 a barrel. Some analysts are rather imagining the price for crude oil may plummet even to USD 10 a barrel and the price at a gas station in USA may go down to 70 cents a gallon. Sounds fairy, doesn't it?
Oil producers are in a melancholy mood knowing that vehicles are increasingly becoming more energy-efficient and people are talking exuberantly about all-electric cars. So, demand for fossil fuel, they know, will be lagging.
Consumers are gaining tremendously, but producers are suffering grievously. The effects will have an impact on financial markets when, if the trend continues, cost of oil production would eventually be higher than its selling price.
The reason behind the price of oil dropping so fast is simple: Supply is high and demand is low. All oil producers are pumping oil more or less at the same speed. Some have even accelerated their production. Saudi Arabia is pumping oil at full tilt and domestic production of oil in the United States has almost doubled in recent years. Oil is being extracted at 9.0 million barrel a day from fracking alone in the United States. And Iran is poised to rejoin the oil market very shortly with an expected output of 4.0 million barrel a day as nuclear sanctions against the country has been lifted. There is now a real oil glut. The world is literally drowning in an ocean of oil.
Sellers who used to export oil to the United States are now knocking at the doors of buyers in other countries in Europe and Asia. Oil from Saudi Arabia, Nigeria and Algeria are now being sold at much cheaper price.
Low energy prices should be a bonanza for an economy, especially for one that is wholly dependent on imported oil, such as Bangladesh. Low price as a result of oil glut, as was in 1986, is an example. Economic havoc caused by a surge in energy price as a result of less oil production, as was in 1973 with the Arab oil embargo, reinforces the belief that lesser the price of oil the better it is for an economy - rich or poor. But too low a price of oil may cause a larger havoc for the world economy due to less investment in oil sector.
Worldwide investment in oil exploration projects worth $380 billion has been put on hold and in America spending in the oil industry has fallen by half from its peak.
It was a two-a-penny job to keep the oil price in the vicinity of USD 100 a barrel if only Saudi Arabia in collaboration with other member countries of the the Organisation of Petroleum Exporting Countries (OPEC) decided to slow down their pumping speed. A central factor in the sharp price drops is the continuing unwillingness of OPEC to intervene to stabilise the oversupplied markets. Iran, Venezuela, Ecuador and Algeria have long been pressing OPEC to cut production to firm up prices, but Saudi Arabia, the United Arab Emirates and other gulf allies are refusing to do so. They don't mind suffering a bit from lesser oil revenue if it could drive out other producers from the industry by flooding the world market with ultra-cheap oil.
Despite Saudi's attempts to kill the competitors, weaker producers have not yet plugged their wells. They would perhaps wait till the price falls as low as USD 15 a barrel. Only then countries like Saudi Arabia (and maybe USA also) can dictate the market. But that can prove to be an illusion too. Few expect a rise in the oil price in the foreseeable time.
If prices remain low for long, Saudi Arabia may find it difficult to persuade other OPEC members to keep steady against their financial strains. The International Monetary Fund (IMF) estimates that the revenues of Saudi Arabia and its Persian Gulf allies will slip by $300 billion this year. The amount is big for a suicidal strategy to defeat competitors.
Meanwhile, analysts believe, Saudi Arabia and other oil-producing countries will continue bleeding financially. Russia has already declared a 10 per cent cut in public spending and Saudi Arabia has slashed its budget quite drastically. Venezuela, where inflation is above 140 per cent, has declared an economic state of emergency. Colombia and Mexico have raised their interest rates. Nigeria is rationing dollars to boost its currency. Ecuador and Brazil are also suffering economic and political turbulence.
Collapsing revenues from oil may ominously bring political instability and fuel rivalries in South America, Africa, and the Middle East. The oil world now looks truly gloomy.
On the other hand, cheaper oil helps countries like Bangladesh, India and Pakistan implement their development plans at a lower input cost. Cheap oil also has a green lining, as it will lower the price of natural gas, and thus will crowd out coal, a dirty fuel. Cheap oil means cheap energy. And cheap energy means an economic boost to millions of people across the world. Why shouldn't we hope that cheap oil be sustained?
Some believe there is a conspiracy to bring the price of oil down. A number of conspiracy theories are floating around. Maybe, the Saudis want to hurt Russia and Iran, and so does the United States. Two powerful oil-producing nations may have a motivation to force down oil price to cripple Iran and more importantly to bring down the Soviet Union. Dropping oil prices in the 1980s did help bring down the Soviet Union, after all.
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