Oil price slump a mixed bag for world economy

By Wang Jiamei Source:Global Times

A confluence of factors have weighed down oil prices, including a strong US dollar, a global supply-demand imbalance and an increase in domestic crude output in the US, the world’s largest oil consumer and importer; all of which are unlikely to change in the months to come. While falling crude prices may mean shrinking revenues for oil exporting countries and regions, they could also lead to a drop in raw material prices, a trend which could lend new economic momentum to oil importing countries and regions.

The continuous growth in oil production has been a major reason behind the recent drop in crude prices. According to data from the US Energy Information Administration, US crude oil production reached 8.4 million barrels per day during the first nine months of this year, up 14.5 percent compared with the same period last year. Meanwhile, Russia also revved up its oil output to increase fiscal revenue, with September production in the country close to the post-Soviet peak of 11.48 million barrels per day set in 1987. Moreover, the Organization of the Petroleum Exporting Countries (OPEC), which provides one-third of the world’s oil, has surprisingly broken from its tried-and-true pattern of cutting production in the face of falling prices; instead the organization lifted output to 31.06 million barrels per day in September, the highest level since November 2012, according to Reuters reports.

On the other side, oil demand forecasts have been largely subdued thanks to the faltering pace of global economic recovery and the shale gas revolution in the US. Despite uncertainties surrounding shale gas development, US demand for oil has fallen noticeably over recent months. Statistics show that only 30 percent of the country’s oil consumption needs were satisfied by imports, down from 60 percent in 2005.

In the meantime, the world’s other top two oil consumers, Europe and China, have also recorded sluggish demand due to their own slowing economies. Because of this, OPEC and several other organizations have already lowered their expectations for global oil demand several times this year.

In addition, the strengthening US dollar has also contributed to falling oil prices. Theoretically, an appreciating greenback would hurt demand for commodities by making them more expensive for holders of other currencies. The US Federal Reserve announced Wednesday the exit of its monthly bond purchasing program, indicating rising confidence in its economic recovery, which is expected to further boost the dollar in the near future.

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