How oil prices affect us

Jes 2 Comments

The oil and gas industry has always been enjoying a high level of prestige. When anyone mentioned that they are working in that sector, people will straightaway know that it comes with at least 3 months bonus. At their peak, some oil companies here give out 8 months bonus which is common knowledge in the market. Now, I heard the standard is only 3 months and profits are declining every year.



To the consumers, hooray to the falling oil prices! A drop in oil price means some savings in terms of fuel for drivers, for electricity and other resources. Cost will also be lowered for importers and exporters due to decreasing fuel prices used for ships. Of course, manufacturers will get to save more due to transportation and hopefully, it will translate to savings for the end customers like us.

It left me thinking about why the falling oil prices is causing the market meltdown currently.

In macroscopic views, it is affecting the world's economy. It started with the increased oil production in USA due to better and newer technology. They have a record high production last year and yet local demand was not catching up. Thus, they needed to find new buyers and lifted the 40 years ban on export to compete with the world market.

Now, Saudi Arabia will not be happy about this, competing on their turf when they are the main player to dictate production and price. So, both will enter a bidding war and try to sell more by lowering prices. Of course, there are other big players like Russia, Venezuela and small players like Iran, Libya and Nigeria. No matter the size, most of them are very dependent on their oil exports. With heavy reliance and decreasing oil prices, most countries are at risk of insolvency, bankruptcy and recession, except wealthy nations like Saudi Arabia and UAE. However, for Russia who relies on oil for more than 70% of their exports, "Russia loses about $2bn in revenues for every dollar fall in the oil price".

Very scary.
It will definitely affect the world's economy if many ailing countries are at the brink of recession. With the fear of recession, people will save up and not spend more, thereby pushing demand down further. This means a slowing economy and this might start a chain reaction due to decreased trade volumes with other countries.

If you think that Asia is not that affected, then think of China who has major dealings with Russia. Their trade volume fell 29.3% last year so when this affects China, it affects us. Singapore is heavily dependent on exports so lower demand for any country is definitely not a good sign. Thus, the market reacts accordingly in anticipation of this fall in global economic growth.

This is a simplified view of my understanding so do let me know if I made any errors.

Jes

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2 comments:

  1. Very well summarize. Deflation may be the result of this competition between OPAC and USA

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    Replies
    1. Hi Evilbdboi,

      Thank you for the compliment! I just hope to skip through all the jargon and understand better about the market. Yeah, deflation might be possible this year with such circumstances but let's see, it's only January!

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