There is a sudden plunge in the price of oil in the world market. Bangladesh, along with other countries, is benefiting from this windfall. According to an estimate, Bangladesh can save up to US$ 2.0 billion a year because of the slide in the oil price.
In 2014 oil price plunged 44 per cent to US$ 66.55 a barrel. The trend continued into 2015. At present oil price in the world market stands around $ 58 per barrel. Oil is the biggest import item of Bangladesh and as such the decline in price will constitute significant savings. This will improve the currently negative trade balance. As energy cost declines non-food inflation will climb down. This would, in turn, help reduce interest rates leading to boost in investment. Most significantly, the government can now remove fuel subsidy which will reduce the budget deficit. The oil-based power plants will benefit as would a number of industries. The fall in oil price will help reduce import cost of raw materials.
Questions have arisen why global market is witnessing record fall in oil prices. Equally important is the question how long will the fall continue. Are low oil prices here to stay?
The price of oil has slumped almost 50 per cent since last summer following the longest running decline for 20 years. This is because US shale oil and to a lesser extent Libyan oil has pushed up the supply. On the other hand, a slowdown in the Chinese and EU economies has reduced demand. In addition, a strong US dollar has made oil more expensive in real terms, pushing demand even lower. All these factors have caused oil price to plummet.
With the booming US shale oil industry that extracts oil from under seabed showing little signs of slowing and growing concerns about the global economy there are good reasons to forecast that the current slump in the oil price will continue for some time.
The present situation should have moved OPEC (Organisation of the Petroleum Exporting Countries), the cartel of major oil producing countries, into action. It would have been normal for them to intervene to stabilise prices by cutting production. It has done so many times in the past. This time it has remained almost indifferent taking no action whatsoever. In an unprecedented move at the end of last year OPEC said not only it would not cut production from its 30 million barrels a day quota, but had no intention of doing so even if oil fell to $20 a barrel. There was opposition to this decision from Venezuela, Iran and Algeria. But OPEC leader Saudi Arabia simply refused to budge to oblige other members. Many OPEC members need an oil price of $ 100 a barrel to balance their budgets. With an estimated $900 billion in reserve Saudi Arabia is a producer apart from others. It can wait and see.
OPEC now supplies a little over 30 per cent of the world's oil, down from almost 50 per cent in the 1970s. This is because of the US shale oil producers are flooding the market with almost 4.0 million barrel a day. Saudi Arabia and other members of OPEC think US shale oil producers should reduce production to put a floor under oil price. Saudi Arabia is not willing to sacrifice its market share while the US shale producers prosper by cutting price through increase in production. Saudi Arabia is confident that it can weather very low price for at least a decade when the market will take care of upstart producers like the US shale oil suppliers. The implications of OPEC's decision not to reduce production go beyond sending the oil price crashing even further. It is not simply a price war but cutthroat competition for market share. The oil market has now started to operate like any non-cartel commodity market.
Without OPEC artificially supporting the oil price and with potentially sluggish demand due to slow global economic growth, the oil price seems likely to remain below $100 for years to come. The futures market suggests the price will recover slowly to hit about $70 by 2019 while most experts forecast a range of $40-$80 per barrel for the next few years.
The benefit from low oil prices, therefore, should be available to countries like Bangladesh for a period of four to five years. But there are a few negative impacts of low oil prices on a number of sectors that may make the prospect problematic. Firstly, at the lower prices that prevail now and are projected for future many oil wells will become uneconomic. Particularly vulnerable are those companies that are trying hard to access reserves, such as deep-water wells. So any plan for polar drilling will have to be shelved as long as lower price prevails. North Sea well production is also at risk in terms of new wells that need an oil price in the range of $70-$80 to make profit. According to an estimate, North Sea oil production could fall by 20 per cent in a low price regime. Another result will be exploration in regions such as southern and west Africa will become uncertain.
Questions are being asked about 'fracking' i.e. shale oil production. The vast majority of US shale oil well will not be profitable at prices ranging from $40 to $50. Major oil companies are already suffering and had to announce cuts of tens of billions of dollars in explorations spending. There are hundreds of other much smaller oil groups across the world with far more uncertain future.
But it is not just oil companies that are being hit by lower oil prices. The renewable sector is suffering as well. Solar power in particular will suffer at the hands cheap oil. Subsidies to renewable sector may have to rise to compensate. Lower oil prices are also a great concern for electric car makers.
The above scenario shows that the knock-on effects within the energy industry of a prolonged period of lower oil prices are both widespread and damaging. It is, therefore, highly probable that an agreement will be reached to reduce oil production and increase prices. So the benefit from falling oil prices is not likely to be long lasting. Bangladesh will have to take note of this.         hasnat.hye5@gmail.com