The Dummy's guide to Falling Crude Oil Prices in 2014
by Olugbenga AjiboyeSo earlier this morning, I was talking with my cousin, he's an Electrical Engineering student, whose sphere of interest excludes, the global economy, the local economy or anything slightly political. Now he's an interesting guy, but this article isn't about him, its about what he represents, the class of Nigerians who do not particularly care for falling crude oil prices, or its effects.
So, I decided to write on the recent developments on crude oil, the falling prices, and what it means to our local economy, this likely is my 3rd article on crude oil in the past 6 months. So yeah, i'm a bit of a crude oil geek.
So, global oil prices are falling, why?
OPEC (google it) used to be the major producers of crude oil, they decide on a fixed quantity to produce each year, and decide this mostly in last two weeks of November for the following year. Until recently, the United Stated developed a process that allows extraction of Shale oil ( a type of energy oil, like crude oil), at a very low cost of production, which had been previously unfeasible in the last two decades. So well, the United States decided, it is a very good time to produce a great deal of oil, and enjoy the high revenues from oil, oil was about $104 in the first quarter of 2014.
So with the US increasing their production each quarter of the year, and given OPEC's constant of 30 million barrels per day. The market is flooded with more oil than buyers are willing to take, so, the price had to fall in other to provide incentive for buyers to buy the same quantity of oil , given that the market is over-flooded, and suppliers are not cutting production. So buyers, crude oil buyers, are having the time of their life, choosing what price they would like to buy what quantity. Oil is important for obvious reasons, since it is the fuel that drives, factories, offices, cars, homes and productivity.
Whew! just said a lot. Okay let's move on to how it affects Nigeria.
My explanation will show two ways in which it affects Nigeria. First, its effect on the Real Sector (factories, firms, consumers), and second the financial sector (the CBN, the banks, financial institutions, accedes to credit etc), it has a third influence which I will not discuss, for an inadequacy of insight, which is the labor market.
Hmmm... you know what?
I will let the above explanation simmer for a moment, and then produce a second article that explains, the two factors i mentioned above..
In the meantime, Merry Christmas to y'all!
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Image source: www.newscientist.com
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