The plunge of OIL prices- how and why ?

 

Oil prices seen plunging to 20$ per barrel.”

“Oil prices rising, dropping markets.”

This is what our headlines had to say when the price of crude oil, as supplied by the Middle East nations rose, to a level next and the global economy had to face the adversities of the move. Also, OPEC, the Organization of Petroleum Exporting Countries agreed to cut the production rates of oil last year, though the agreement is still under scrutiny.

As the background information, oil is supplied by the Middle east nations of the world, namely Iran, Iraq, Saudi Arabia, Qatar etc. In total, we have thirteen nations that have the sole ‘responsibility’ of meeting the oil requirements of the world and maintaining a stable price for the resource. However, lately we have seen how the oil prices have constantly been on a plunge and this causes a havoc in the export market globally. Let’s see how.

Now there are several reasons why the oil prices drop and the biggest of all is the appreciation in US dollar. Looking at the situation technically, as other nations are not able to achieve the benchmark standards of growth or don’t perform up to their full potential, their currencies depreciate as compared to the dollar. This ultimately leads to a drop in the oil prices, thus, the demand rises, leading to inflation and further drop in the currency exchange rates.

Another huge reason why we arrive at this scenario is the unavoidable play of the demand and supply factors. We see how nations are progressing and such infrastructural improvements should raise the demand for oil; this leads to an increase in supply and ultimately the prices play in the picture!

The drop in oil prices critically surprises the Wall Street. With future contracts trading at high volumes and investors’ and companies’ expectations of surging prices, the oil is probably the only resource that works in a complete opposite way.

Another major reason that has come to the upfront for the dropping price is that many nations, due to environmental concerns, have decided to switch away from oil and other fossil fuels. However, if we look at another part of the story, eve if the dropping prices, the demand is not rising. This is because the global economy is not in great shape; with almost every nation struggling with one or the other problem of its own, be it the currency exchange rate, a depressed economy  or a deficit issue, we are not able to climb the ladder of success that we should be.

Weekly Average OIL PricesAnother bad news is that the economists don’t expect the situation to improve any time soon. Rather analysts say that the oil prices will never rise again. The prices have to fall to as low as 15$ per barrel to impact production!

Now, is this situation an adversity for everyone? No. The most obvious winners from the dropping prices are us! Yes, we the consumers. Oil prices are falling double digit and we, here are the biggest benefiters. Next on the list come industries that use oil as the major part of their raw material or processing.

However, the prices are rising and as we see, there’s nothing good about it. So, what do we do? The government has taken a number of steps to repent the situation. Monetary and fiscal policies have been enacted, subsidies and tax reforms granted and structural changes have also taken place.

Yet, we are STUCK and as per evidence, statistics and reports, the mess is not expected to be cleared anytime soon. We are caught in the spiral and attempts to come out are just making us fall harder.

 

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