Oil prices have greatly collapsed. They always do. World Economic Forum has announced a further drop in prices for oil. Russia, Saudi Arabia, and the United States are the main producers of oil in the world. So, can you guess the basic reasons for economic development and overall wealth of these countries? Iraq and Iran are catching up with leaders too. In my response to the ICIS article titled The Oil Price Crash and What It Means for the Petrochemical Industry , I am going to agree and disagree with the corresponding information with relation to different sources and opinions.
What Do Lower Oil Price Mean for Petrochemical Industry?
Because of the increased market share, some people would benefit from the growth in oil prices. The recent drop is an alarming sign of the world’s crisis. Millions of global projects were simply iced. As for the petrochemical industry, the prices for its goods and services decline with the fall in oil prices. For instance, lower benzene is caused by the latest change in oil prices. So, regular consumer will win from such situation, while petrol producers will lose revenue. Recent crack of margins lead to the general panic in the industry.
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But aren’t we running out of oil? Should not the prices go up? Citizens of the United States believe that purchasing a gasoline below $2 per gallon is a great advantage. They blindly think it will raise American economy. They simply cannot get that decreasing consumer price levels is leading to the dramatic drop in the wage growth. More experienced citizens share that an encouraged drop in oil prices minimizes inflationary, outside, and fiscal tension in those countries that act as the importers of this substance.
The representatives of the global stock market are warning that cheap oil fee is a bad feature for the stock market. As the result, NASDAQ and Dow demonstrated horrible results at the beginning of 2016, and it may get even worse due to the cheap oil. It means a negative boom for traders and shareholders around the world. It all leads to the lower investments in the oil sector.
Decreased crude prices have sharpened the negative mood on international chemical markets with the greatest influence in Asia. An immediate reaction of the main petrochemical feedstock naphtha to the changing fees proves the significance of oil to the destiny of entire industry.
“Approximately 55% of global ethylene production is based on naphtha and heavier liquids” (Davis and Fleming, 2014, p. 5). Being industry absolute leaders, these two branches stand for the massive production of olefins and aromatics streams that are influenced directly by shapes in the oil price. As the result of this dramatic fall, chemicals demand growth slowed down by 4% in 2014 when the case took place. It all leads to the drop in international economic and industrial development. Forecasts of future growth have been lowered by some commentators because of the difficult global economic outlook.
Petrochemical trade became much weaker. It all was reflected in the low inventory levels. Nobody wanted to purchase inventory fearing this industry would soon become unprofitable. In the face of risks associated with costs and demand uncertainty, both manufacturers and customers have run down inventory.
Chemicals trade tends to be weak in December; the weakness of chemicals indicators is a reflection of this as well as of current low inventory levels. Chemicals producers and consumers have run down inventory in the face of cost, price and demand uncertainty. As for the prices, we can see a strong correlation between the fees for common “petrochemical prices, including those for cracker products” (Davis and Fleming, 2014, p. 5), and price of crude oil. When the last one decreases, the costs for the ordinary liquids cracking complex and the cost curve aligns.
OPEC members proved drop in oil prices has more adverse effects by rejecting to provide production cuts since 2014. Earlier, Saudi Arabia had an opportunity to influence OPEC decisions and figured as the cartel’s swing manufacturer. OPEC’s refusal symbolized huge modifications in the cartel’s policies goals from aligning “oil price band to maintaining market share” (OECD, 2011).
The dramatic decline in oil prices since 2014 has more negative consequences than positive episodes. Despite regular citizens feel like saving a plenty of money on cheap gas and decreased external and fiscal pressure, there is a range of things to worry about. For instance, due to the low oil fee, fiscal and external issues as well as economic activity are weakened. Decline in sector’s investments frozen many perspective global projects. Finally, lower prices for oil turn in “the risk of downgrades and defaults” (Leduc, 2015, p. 4). To sum up, oil prices should be controlled at the level before 2014 in order to contribute to the world’s further economic development.
References
Leduc, D. (2015). Why the Benefits of Cheaper Oil Outweigh the Drawbacks . The Bank of New York Mellon Corporation.
Davis, N., and Fleming, N. (2014). The Oil Price Crash and What It Means for the Petrochemical Industry. Reed Business Information Ltd. ICIS, pp. 1-6.
OECD. (2011). The Effects of Oil Price Hikes on Economic Activity and Inflation . OECD Economics Department Policy Notes No. 4.
