Brent Crude, a benchmark for prices in the oil industry, has now dropped to its lowest level since 2004, spelling trouble for governments who rely on income from oil exports to fund their countries.
After having fallen by more than 50% over the last year, Brent Crude has now dropped to $32.62 per barrel, in the wake of competition from US energy stocks, as well as economic troubles in China, the world’s biggest importers of oil.
Oil prices are now 70% lower than they were in June 2014, when prices first started to fall.
The bulk of the downturn in oil prices has been due to high supply and shrinking demand, with China’s draft of economic troubles following the depegging of the renmibi last year being largely responsible for the latter.
Last year, China overtook the USA as the world’s biggest oil importer, and with the former’s economy currently essentially in turmoil, demand for the commodity has plummeted. Add to this competition from US produced shale gas and intentional maintenance of high levels of production from OPEC nations (in a bid to maintain control over the energy market generally), and the result is consistently falling prices.
As one BBC reporter states: “demand for crude tends to fall when the US dollar is stronger against currencies of purchasing countries and China remains the world’s biggest energy consumer.”
Yesterday in China, shares dropped by 7% and as a result, a safety measure was triggered, suspending all trading in the country in an effort to stop widespread panic selling. This is now the second time this has happened this week.
In addition to the drastic fall in demand for oil that follows events like this, not only is OPEC still maintaining high levels of production, but US production has actually increased. The US now produces 9.22 million barrels of crude oil every day after production rates increased for the fourth week in a row.
Indeed production is now so high that the US is running out of space to store oil, despite having the largest storage capacity of any country in the world.
Paul Stevens, professor at the University of Dundee, said: “Storage is pretty much full and people are already talking about buying tankers as floating storage. But if supply continues to outstrip demand, then the only things that you can do with the oil is sell it, which inevitably pushes the price down.”
All of this has raised questions about the financial viability of oil production in the North Sea, as investment shrinks and jobs are lost across the board.
Analyst Alan Gelder said that oil producers in the North Sea are “beginning to really feel the pain” as prices plummet, and that the only way these producers are surviving is by reducing costs.
Many are now predicting that prices will continue to fall to below $30, potentially even dropping to $20.
Recently, a spokesman for the Russian government expressed grave concern over the nation’s economic stability should prices fall to $20 a barrel, given the extent to which they rely on oil exports to fund their economy.