In recent times, there is a sharp downturn in the prices of the crude oil. What is / are reasons for this?
1. The demand for oil has decreased in large Asian economies such as China
2. Shale gas exploration and extraction has increased in countries such as US and Canada
3. Oil production in Iraq and Libya has increased suddenly
Select the correct option from the codes given below:
Economic Survey: Box 2.3
Reasons of drastic fall in Global oil prices
Global prices of crude had stayed above $100/bbl since 2010. However, there has been a sharp downturn in these prices since September 2014. From July 2014 when they stood at $106.30/ bbl, they have fallen to below $50/bbl in January 2015. This sharp fall can be attributed to weakening of demand in the economies of Asia, especially China, and Europe. In addition, exploration of shale gas by countries like the United States and Canada to reduce their dependence on oil imports has led to lower demand for oil. This has also
resulted in reduced retail prices of diesel, domestic LPG, and kerosene.
Four things are now affecting the picture.
• Demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other fuels.
• Second, turmoil in Iraq and Libya—two big oil producers with nearly 4m barrels a day combined—has not affected their output. The market is more sanguine about geopolitical risk.
• Thirdly, America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply.
• Finally, the Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. They could curb production sharply, but the main benefits would go to countries they detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves. Its own oil costs very little (around $5-6 per barrel) to get out of the ground.
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