Wednesday, January 7, 2015

Why are oil prices falling globally?

Net oil importing countries (including those who import only) are enjoying the low petroleum prices in the international market as it helps them to manage public finance by lowering fuel subsidies and strengthening balance sheet of state-backed petroleum suppliers and distributors. In the case of Nepal, Nepal Oil Corporation is seeing net losses narrow down (there is still loss in the sale of LPG cooking gas) and consumers are enjoying the declining fuel prices. Non-food inflation seems to be cooling down as well. The government recently allowed the NOC to adjust fuel prices based on international prices (basically the price IOC charges to NOC plus taxes, interest payment on past loans, transportation losses and commission). Lets hope that domestic fuel prices is also increased when international fuel prices start to climb up.

For now, what are the main causes of lower fuel prices? It has to do with a combination of demand and supply forces, along with lower cartel power of OPEC, at play. The Economist lays down the main causes as follows:

  1. Low demand arising from low economic activity, increased efficiency and a switch to alternative sources of energy
  2. Turmoil in Iraq and Libya has not affected their output.
  3. The US has become the world’s largest oil producer (it is importing less oil now).
  4. Saudi Arabia and some Gulf countries are unwilling to lower supply (and hence their share in total world output) to put upward pressure on prices.

The combined effect of these forces are lowering oil prices since the high of $115 a barrel in June 2014.

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