Htet Tayza discusses the effect that falling oil prices may have on the global economy in 2016.
The Organisation of Petroleum Exporting Countries (OPEC) recently announced that they wouldn’t reduce their 30 million barrel per day oil output. Subsequently, global oil prices dropped to a seven year low in the first week of December 2015, due to fears that OPEC’s decision would flood more oil into an already oversupplied market.
Oil prices started falling in the summer of 2014, due to a number of factors that created a glut in supply. These factors include:
- A rise in American oil production: Innovative fracking technologies have allowed US oil production to increase substantially over the past few years.
- OPEC’s output: The organisation maintained output in 2015, even after prices started falling.
- Reduced Chinese demand: The People’s Republic is a massive consumer of commodities, however the county’s demand for oil has waned throughout the year.
Therefore the ratio of global oil supply to demand is high. OPEC’s decision to maintain output is likely to mean that the worldwide oil glut will continue through to 2016.
Investors who are hoping for a rebound in 2016 may be disappointed according to Fatih Birol, the executive director of the International Energy Agency (IEA) – an organisation which implements a global programme of energy co-operation among 28 member states. Commenting on CNBC, an American news outlet, he said “when we look at 2016, I don’t see many reasons why we can see upward pressure on the prices.”
Birol went on to say, “demand is weaker and we may well see Iran come back [to the market] and there will be a lot of oil.” The executive director added: “So 2016 may well be another year with lower prices and this will have implications of course for investments in the oil sector.”
According to IEA estimates, investments in the oil sector decreased by over 20% in 2015 – the steepest rate of decline in history, and they’re expected to fall further next year. Birol said: “we have never seen in the last 30 years, oil investment declining for two years in a row and this will have consequences for the markets in the next few years to come.”
Htet Tayza comments
OPEC’s decision to maintain production seems to assure that oil prices will continue to decline next year. If 2015 is anything to go by, this will have a knock-on effect on investments in the oil sector. The real question is, what effect will this have on the global economy? The International Monetary Fund (IMF) argued earlier this year that the net effect of a continued global oil price fall would be positive.
It would hit oil exporting countries such as Canada, Russia, and Venezuela. The Wall Street Journal wrote that all these nations saw the value of their currencies fall, when measured against the US dollar, the currency used to sell oil, in the immediate aftermath of the recent decline of international oil values. However, the IMF suggested that lower oil prices will prompt people to spend more money. Consumer spending is expected to drive global economic growth in 2016, so if oil prices do continue to decline it may boost economic activity next year.