Oil Prices Decline: A Review

Constantine Deus

The Tanzania Energy and Water Utilities Regulatory Authority (EWURA) announced a drop in oil prices on 2nd February 2015. This was the third time such an announcement was being made in three consecutive months (between December 2014 and February 2015) in Tanzania. The decline in fuel prices in the local market in Tanzania and other countries around the globe is happening at a time when the price of one Barrel of oil in the world markets is reported to have declined up to 40% (from US 115 to USD 70). A number of factors explain the drop in oil prices.  

One of the factors is the political economy of fuel energy in the world market. It is worth noting that the giant producers, members Of OPEC (Organization of the Petroleum Exporting Countries) such as Saudi Arabia, USA, Nigeria, Kuwait, Venezuela and others have always worked to stabilize fuel prices in the world market when there was a possibility for decline in prices to a large extent. For instance, during the global economic crisis of 2008 to 2010, fuel prices could have prodded sharply following the declining demand of energy in the economic recession. However, OPEC countries stabilized the market by reducing production and giving chance to Saudi Arabia to continue producing highly with an agreement that when the world economy stabilized, other members would continue their production pace while Saudi would reduce her oil production to give benefits to all cartel members.

Contrary to the expectation, following the recovery of the world economy, Saudi Arabia did not reduce her crude oil productivity. Saudi Arabia was afraid of losing her share in the world market to emerging crude oil producers. Instead of cutting down her production of crude oil, the country has reduced its export prices to continue competing in the world market hence keeping the fuel prices down all over the world. 

Similarly, in November 2014, the world witnessed a high profile meeting of Asian Pacific Economic Cooperation (APEC) countries. Leaders of great nations such as China, Japan and the USA attended the meeting. The meeting was followed the ministerial meeting of APEC countries that discussed the stabilization of fuel prices in the world market. Some APEC members argued that production should be reduced for market stabilization while other members argued against the approach. It was emphasized further that production should continue and the market will take care of the rest. I think such disagreements are currently benefiting the market as they result to declining fuel prices.

Another factor behind the declining fuel prices is the increase of crude oil production in the United States of America. It should be clear that USA used to be the major importer of crude oil than any other country in the world. However following the development of sophisticated technology for exploration of shale oil which was previously considered unreliable, importation of fuel to USA has largely declined.  It is reported that recently, a Russian Rosneft company spent about two months and USD 700 Million to drill a single oil well in Kara, Northern Siberia whereby American Exxon Mobil spent less than a week and USD 1.5 Million for mining and processing of shale oil in Colorado. This means that the shale oil production is more economical and contributes to crude oil boom. USA is reported to have reached a 9 billion Barrels of oil production per day while the largest world supplier (Saudi Arabia) produces 10 Billion Barrels of oil per day.  Saudi Arabia’s share of fuel in the world market is more than 10% while USA does not export that much hence contributing to fuel booming in the USA market to cut of imports. 

A third and crucial factor is that crude oil is no longer scarce as it used to be. This is due to the fact that oil and gas deposits are continually being discovered around the world. As reported by the African Development Bank (AfDB), up to the year 2012, oil deposits had been discovered in 21 countries while gas deposits had been discovered in 24 countries in Africa. In some of the countries explorations are underway while other countries are already benefiting from extraction of their energy resources. In one way or the other, fuel discovery phenomenon contributes to the declining of the fuel in the world market since the energy is no longer scarce.

Fourth, is the search for alternative energy following climate change issues. The factor has continued to decrease fuel consumers hence reducing the demand for fuel in the world market. There is an increase of electrification of vehicles, trains, machineries alongside with the increasing use of solar, wind, biogas and other alternatives energies. East Africa still remembers the invention of an electric car in Uganda that was launched towards the end of 2014. Electric cars were as well exhibited during the 2011 international on climate change COP 17 held in Durban South Africa. Those cars are also increasing in the American car markets. Such inventions have had effects in reducing fuel consumption leading to high supply in low demand. 

Lastly, invention and use of more fuel economical cars has also reduced the speed of fuel consumers to a large extent. The fuel market had reached its high price sale prior to the 2008 economic crisis, even though the crisis destabilized the market, it gained momentum starting from 2011 to 2013. During that period, fuel business was beneficial but the pain was on the consumers and car manufacturers. This led to the adoption of less fuel consuming cars particularly from Asian manufacturers who targeted consumers in low income countries with low purchasing power. With time, the car markets have had many car users with insignificant fuel consumption resulting to a low demand of fuel at the time when crude oil production is skyrocketing.