Crude Oil Prices Plummet As Supply Outstrips Demand
But pump prices are increasing in some countries.
The sharp drop in crude oil prices is probably the biggest energy story to grab headlines recently with major repercussions for all countries worldwide. Brent Crude for November settlement dropped to its lowest since mid-2012, to US$92.11 a barrel on the ICE Futures exchange. West Texas Intermediate (WTI) slid below US$90 on 2 October, the first time since April last year; this comes the day after the world’s largest oil exporter, Saudi Arabia, slashed selling prices to a six-year low.
Analysts are taking this as an indication that Saudi Arabia would rather let prices fall than reduce its market share. Saudi Arabia along with the rest of OPEC members account for about 42% of the world’s oil supply, according to estimates by BP Plc., the third largest European oil company.
With supply from the US rising and imports declining, an oil price war may be looming. Even as demand is weakening, the American shale boom has domestic oil fields producing more than they ever had in more than four decades. This year, US oil output will reach 1.1 million barrels a day, according to the US Energy Information Administration (EIA), but consumption is forecast to shrink to 18.9 million barrels a day, the lowest since 2012. OPEC’s output last month was at a one-year high of 30.935 million barrels day, with the largest increase coming unexpectedly from Libya, which is in the throes of a civil war.
To put it simply, there’s just too much oil. The EIA has reduced crude price forecasts for next year because of the rising production and decreasing consumption: Brent was reduced to US$101.67 from US$103 and the WTI was cut to US$94.58 from the September projection of US$94.67. According to the International Monetary Fund (IMF), OPEC needs to curb further declines as its members rely on the high prices to fund social expenditure; to balance their budgets, Saudi Arabia needs prices to be at least $87.63 a barrel, the UAE requires US$66.50 a barrel while Iraq needs it to be at US$92.96 a barrel.
According to Wood Mackenzie, an Edinburgh-based industry consultant, 70% of the US reserves would remain economic if global prices are at US$75 a barrel. Furthermore, shale oil, which is very much more expensive to extract, is only viable at higher prices. Shale oil production costs US$50 to 100 a barrel while conventional sources from the Middle East and North Africa requires only US$10 to 25, according to estimates by Citigroup Inc., a French International Energy Agency.
With the drop in crude oil prices, end-consumers are cheering as prices at the pump are making its way to a record low for the year. On Monday, the average price per gallon in the States was US$3.279; on Tuesday morning, the price was down to US$3.273, not far from the lowest price so far this year which occurred one day in February, when the average was only US$3.271.
Canada’s pumps affected by weak currency and stalled refinery.
While a tandem price dip at the pump is occurring in most places, not so in Canada where refinery issues are causing prices to rise instead. Even though the country has ample supply of cheap crude oil, Canadian refineries are still having to buy products from the US at a time when the Canadian dollar is weak; this time last year, the Canadian dollar was equivalent to about US$0.97, but now it is less than US$0.89. Thus, the pain is passed on to the consumers.
On top of that, the country’s largest refinery, Irving Oil, has commenced a multi-million eight-week maintenance project on its facility sometime in mid-September, hampering the production of petrol; in other words, plenty of petroleum, not enough petrol. At full capacity, the facility can produce up to 320,000 barrels a day.
In Toronto, Vancouver and Montreal, average petrol prices are higher than a year ago, and higher disparity are occurring in places like Halifax, where drivers pay an average of 135.2 Canadian cents a litre compared to 125.4 cents the same time last year.
Second petrol price hike in Malaysia in just over a year.
Malaysians share the same woes at the pump as the Canadians, except with very different circumstances pushing up prices. With its usual flair for announcing petrol price hikes at the eleventh hour, the Malaysian government announced during the evening rush hour on 1 October that petrol and diesel subsidy would be reduced by 20 Malaysian cents when the clock struck midnight that night. Petrol stations were inundated with drivers, some of whom queued for up to 30 minutes to fill their tanks.
The new prices for RON95 and diesel are now RM2.30 and RM2.20 per litre. According to the Ministry of Domestic Trade, Cooperatives and Consumerism, the fuel subsidy reduction was in line with the government’s plan to strengthen the nation’s finances. The statement also mentioned that: “Despite the increase, the government will still need to spend more than RM21 billion on fuel and LPG (liquefied petroleum gas) subsidies for this year.”
Netizens have taken to social media to lash out at yet another petrol increase, the second hike in just over a year, and one that comes at a time when crude oil prices are at a three-year low.
According to Institut Rakyat, the policy think tank established by the opposition party PKR, continuing with subsidy rationalisation when the country’s wage growth is sluggish and public transportation is still lacking will lead to Malaysians suffering, compounded by the push for private vehicle ownership during the Mahathir era. According to its Director, Yin Shao Loong, who was speaking to Malay Mail, the people were then stuck with “burdensome” loans, which forced them to continue to bear fuel price hikes and subsequent inflationary effect.
“Having a viable public transport alternative would have given a boost to the disposable incomes of workers and freed them from one source of debt,” he was quoted as saying. “As it is, were commuters to abandon their private vehicles today and convert wholesale to public transport the latter system would not have the capacity to move them efficiently.”
Malaysians are now holding their breaths as the Goods and Services Tax (GST) of 6% will take effect on 1 April 2015, and as of now, the government has yet to decide whether petrol will be on the exempt list. If it is not, then price of RON95 will increase to RM2.44 per litre; however, it would also mean that petrol will be both subsidised and then taxed by the government, which is counterproductive.
Until the government announces its decision, the people of Malaysia (which include us Automologists who reside in this, in spite of it all, beautiful tropical country) will be bracing for a third increase in petrol prices in less than two years.
UPDATE: 10 October 2014 – the government has announced, in the tabling of Budget 2015, that retail sale of RON95 petrol, diesel and LPG will be exempted from GST. We heave a sigh of relief.
images: ibtimes.co.uk, fellonmccord.com, irvingoil.co, thestar.com.my