Reasons for Oil Price Crisis

Oil prices generally move between 100-115$/bbl but after 2014 it started sliding down. Around April 2016 it was trading around 30$/bbl.This major decline is due to various number of reasons.

Increase in U.S oil production is the major reason of this slow down. This increase in oil production can be credited to advancement in Hydraulic fracturing in shale rock. Shale which is a source rock and has very low permeability was earlier considered as bad reservoir rock due to low fluid flow. But due to advancement in hydraulic fracturing we are able to increase the permeability of shale and don’t have to wait for hundreds of years for the oil to migrate from source rock to reservoir rock. We are now directly producing from the source rock. In U.S hydraulic fracturing is done on such a large scale that even the ground water is contaminated with Shale gas. Increase in production is also due to increase in drilling which can be calculated by rig count.

Second big reason is the lifting of Sanctions from Iran. In 2012 Iran was importing high volumes of uranium which they insists were exclusively for peace but the world’s superpowers have been unable to verify this. Due to this in 2013 U.S have imposed sanctions on Iran which also prohibited countries from buying oil from Iran. Due to these sanctions there was slow down in Iran. After sometime these sanctions were uplifted and Iran was again back in oil market and has now ramp up its production to bring its economy back on track.

Third reason is the slowly but gradually approaching slow down around the world. China and India are which are the growth center of the world are themselves slowing down.Other countries are also developing at very slow pace. Due to this slow down there is low demand for energy.OPEC can again take the oil prices to sky-high but due to the fear of losing market share there is no agreement among the OPEC countries to reduce production. In Nov 2016 OPEC has implemented a production cut which had taken the oil prices from 40$ to 55$.

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