As Brent crude oil traded at a four-year low of less than $88 a barrel on Monday, it is evident that a price war has broken out in the global oil market, which could keep crude oil prices low for some time.
The Organization of the Petroleum Exporting Countries (OPEC) — Saudi Arabia, Kuwait, Iraq, Iran and the United Arab Emirates — started cutting oil prices last week for European and Asian markets, suggesting a fierce war for global market share.
However, what is starkly different from the current free fall of oil prices as compared to the oil glut of the 1980s, when crude oil prices had fallen from $27 to below $10 per barrel, is the new strategy of Saudi Arabia, to forego prices for market share.
In the 1980s, Saudi Arabia stuck to defending prices by cutting down production from more than 10 million barrels per day in 1980 to less than 2.5 million barrels per day in 1985-86, according to Reuters.
However, since other OPEC members chose to continue with their supply of oil, Saudi Arabia suffered a huge deficit, and hence, this time, it has chosen to tolerate falling oil prices.
In a briefing on the kingdom's shift in policy, Saudi officials announced last week that Saudi Arabia was prepared to 'tolerate a period of lower prices' in order to retain market share, according to Reuters.
"Saudi comments indicate that it may have shifted from a strategy of holding prices at around $100 a barrel to a focus on market share," Jeff A. Dietert, head of research at Simmons & Company, an independent investment bank, told The New York Times. "That means there is not an immediate floor on oil prices."
Demand More Than Supply
Analysts believe that this phase of subdued international oil prices could last for some time, as the oil market is seeing an oversupply in the face of falling demand.
According to the NYT report, energy experts believe that there is already an excess of one million barrels in the world market, which consumes 90 million barrels each day.
The oversupply has resulted from a decline in demand for petroleum products, especially in Europe and countries such as Japan, mainly because of the use of other alternatives such as coal and natural gas.
In fact, oil consumption across all industrialized countries was down by 200,000 barrels a day this year compared to 2013, according to the NYT report.
On the other hand, oil production has increased in countries such as Saudi Arabia and Libya. Saudi increased its production by 100,000 barrels a day in September, while Libya increased its production by more than 500,000 barrels a day in the last few months.
However, even though Brent oil prices have slipped by about 25%, OPEC countries are expected to not act any time soon to rein in falling prices.
Kuwait had earlier said that OPEC is unlikely to cut oil production as it may not necessarily be effective, Reuters reported. In fact, OPEC produced 4,00,000 barrels of crude oil a day more in September compared to the previous month.
If prices have to stabilise again, it is imperative that OPEC countries come to a consensus, as they together produce about one-third of the total oil globally.
"If the price stabilizes around here, it is probable the Saudis will argue to wait until the November meeting when OPEC can cut the output quotas for the first quarter of 2015," Michael C. Lynch, president of the Strategic Energy and Economic Research consultancy and adviser to OPEC, told NYT.
However, a consensus seems unlikely even in the November meeting as a rift persists among OPEC nations to gain more market share.
India has much to Cheer About
The global fall in crude oil prices is a good news for India as it will reflect in lower diesel and petrol prices in India.
Diesel prices could be cut by ₹2.50 per litre while petrol prices could fall by almost ₹1 per litre this month, as reported by Business Standard.
With India dependent on imports of up to a billion barrels of oil every year, which constitutes for more than three-fourth of its oil consumption, it can also address its issue of current account deficit, which experts say can fall to 1.3% of the GDP if the crude oil prices remain low, as reported by The Economic Times.
"If the price of Brent oil remains close to $90 per barrel for the remainder of this fiscal year and FY15-16, we estimate that the current account deficit could improve by an annualised 0.4% of GDP (gross domestic product)," as per a note by Barclays Research, reported by Mint.
The government's fiscal deficit also stands to improve as it can minimize its under-recoveries, the difference between the retail price of fuel and the cost of imported fuel. It can thus lower losses from selling fuel below cost. In fact, the government is now seeing an over-recovery on diesel prices, which reached ₹1.90 a litre on 1 October and could further rise to ₹2.50, according to the Business Standard report.