Oily days Oils fall from Grace

Oil, an important commodity, the driving force of development, the harbinger of growth, has
seen its fair share of ups and downs in the recent past. From a steep high of around $100 per
barrel in 2012, there has been a nosedive to around $30 per barrel in 2016 and is currently
priced at $50 per barrel.
Going by the economics principles, the price is affected by only two stakeholders, buyer and
seller. To analyse the current oil slash, a peek into the retrospective data will help. There have
been two such instances of oil price slash in history.
In the mid-1970s, when OPEC was formed by the Middle East countries, the oil prices rose.
The oil market was dominant by the cartel and so evidently the oil prices. The cartel decided
to raise the price by lowering the demand for oil and by 1980s price shot through the roof. In
the mid-1980s, the demand for oil increased due to rapid growth in the Asian region. This
increase in demand encouraged non-OPEC to enter into the market. But, despite an increase
in the supply, OPEC nations didnt reduce their supply which led to over-supply in the market
and thus, prices plunged. This was the supply side effect on oil price.
There was a slow recovery from the 1980s and price rose to $100 per barrel by 2008. But the
2008 recession has a shocker. The prices fell to $40. The recession led many industries to shut
down their production, which in turn reduced the demand for oil, which led to a decline in oil
prices. This was the demand side effect on oil price.

The growth of China supplemented the recovery of oil price slash, and the prices came to the
level of $100 per barrel in 2012. Thus, this effect was short-lived. The prices fell to $30 per
barrel in 2016. This price effect had a combination of both supply and demand effect. Coming
to supply side, ban on Iran was lifted by the USA, following which Iran vehemently
participated in the oil market. The 40-year ban in the USA to export oil was lifted. It led to
more exploration of oil in the USA and consequently more oil in the world market. In the wake
of all this, OPEC continued its ignorant attitude. The lack of coordination between the cartel

intensified the conditions. Saudi Arabia wanted to use predatory pricing. Thus it produced
even more oil to throw out the competition. All these aggravated the problem and led to an
oversupply.
But there also another part of the story, the frightening one, the demand effect of the story.
Oversupply is not a major concern but low demand is. Oil consumption is directly related to
the fuel consumption of any country; this implies that oil consumption is a clear indicator of
how much oil is used by countrys transport, industries, etc. Thus, it clearly indicates countrys
growth. More consumption by industries means more industrial production. Thus, a low
demand is a harbinger of slack growth, and thus is a cause of concern. The past two years
have seen a decline in demand for oil as well. Chinas economy, which was a major world
market, broke down. Chinese fall had a domino effect on countries like India, who rely on
China for trade and thus oil demand reduced all over.
There is also a bigger problem hanging around. Its not only oil that suffered, the entire
commodity prices crashed. This led to Brazil crisis, China break down. It shows that the
demand effect was dominant in the recent oil crisis. If this is the case, the repercussions are
serious. It clearly indicated a coming depression, if appropriate measures are not taken by the
think tanks.
Though the prices have recovered to around $50 per barrel currently, it is unlikely to recover
to its previous levels in coming years. It seems a long term effect but hope its not a portent
of depression.