Note 1: In
world every good has a price, demand side and a supply side. The higher demand
OR lack of demand hints supplier to increase OR decrease price of a good
accordingly.
Note 2:
Someone told you "An apple a day keeps doctor away". Now you decide
to eat apple and you think its nutrients rich. People like you think similarly,
such that, apple gains prominence.
Now combine above two NOTE and read
on. You have 100(some currency) with you and you went to market on a bicycle to
buy apples. Seller says each apple is 12, you bargain badly with seller.
Finally both of you agree on 10 per apple, and you bought 10 apples for 100. Both
seller and buyer are happy (don't worry about how much it costs for the seller;
limit your imagination to this transaction under current market conditions of
this buyer and this seller). Now someone goes in a BMW car to buy apples from the same seller, this guy will not
bargain and buys at 12 per apple. Essentially 100 fetched buyer1 10 apples, for
buyer2 8.333~ apples.
What if apples production is scarce? Now seller will not heed to buyer 1 bargain and for buyer
2 this seller might quote a higher price (say 15). In this scenario buyer1 gets
8.33 apples for his 100, buyer 2 gets 6.666~ apples for his 100.
What if there are abundant apples? Now this Seller might drop the price to 10 per apple.
Buyer 1 will still bargain for 8 per apple and gets 12.5 apples for 100. Buyer
2 will get 10 apples for his 100.
Moral of the story is, any
"Good" be it apple, t-shirt, gold or Oil, the price of it is
determined based on goods availability, the quality of goods, suppliers greed,
purchasers bargaining ability, purchasers financial ability etc.. Which are called
market forces. With this knowledge lets now try to understand recent trend in
decreasing Oil prices, how it affects $, how it is affecting Russian Ruble and
Indian Rupee.
On October 13th 2014 there
was statement that “American shale gas ends Saudis domination”. America has
invested in technology on Oil drilling techniques like horizontal drilling and
hydraulic fracturing; this enabled to produce 10 million bpd (Barrels per day).
World’s current demand for Oil is around 90 million barrels per day. “The U.S.
moves steadily towards meeting all of its energy needs from domestic resources
by 2035” according to IEA (International Energy Agency). It is estimated that
Saudi Arabia has 30% of total world Oil reserves, so that it can challenge
American production in short term. This prompted Saudi Arabia, who is the
highest producer of Oil to increase its production from 10 million bpd to 12
million bpd to trade off decreasing prices and to remain in competition. Prices
are further dropping as there are more apples (Oil barrels) in market, got it?
There are few conspiracies that need
to be quoted now. One, Sunnis of Saudi Arabia wants to hurt Shiites of Iran,
who need high-priced oil which is major part of revenue. Two, as expressed by
Russian President Vadimir Putin, is that this is a conspiracy to undermine
Russia, one of world’s biggest energy producers.
Truth is, countries depending on Oil
export to meet their budget revenues, have an option to sell more quantity
(i.e. more barrels of Oil) at lower price to trade off decreasing Oil prices. At
normal price of 10, you can sell 10 apples to meet target of 100, when price
falls to 8, you need to sell 12.5 apples to meet target of 100. Saudi Arabia
and Iran both are part of 12 members OPEC (Organisation of petroleum exporting
countries). Can Iran do the same thing as the Saudi did to increase the Oil
production to meet its revenue target? answer is NO, since it is facing sanctions from Western countries (http://en.wikipedia.org/wiki/Sanctions_against_Iran ). Iran currently produces 1 million bpd, and has plans
to expand capacity to increase to 4 million bpd but cannot sell more than 1
million bpd. In Oct’14 the price of 1 barrel crude oil was around $90; now in
Dec’14 it is around $60. Russian, Iranian government's budget projections are
based on Oil prices at $100 a barrel to meet their budgetary revenues. With
decreased price per barrel, now you know who is hit.
Ripple Effects: Given
a chance to choose your currency for your salary, will you choose INR, Ruble,
Yen or Dollar. Many of us would choose to earn in Dollars, as it is de-facto
standard in today’s world and its “Most prominent currency”. Since US is trying
to become self-sufficient with respect to Oil dependence and now it started to
produce just enough. It has started to spend less to buy Oil from world market.
So US will inject fewer dollars into global markets. Now you know what is
“Apple” in NOTE, as everyone wants “$” and as it is de-facto standard they will
try to grab more dollars to balance their foreign exchange reserves. Availability
of less dollars in market meaning high demand for it, i.e. high INR for 1 $. India
now when want to buy a “$” it has to pay more Rupees. These countries need more
dollars as foreign exchange because, many other countries would accept only
dollar for exchange. So currencies of countries like India, Russia have started
to depreciate.
Lower Oil Prices – What it means to economies: As an end user you spend less on gas means higher
spending on consumer goods, apparel and especially higher holiday spending
(this is December). It is calculated that 10$ decrease per barrel can cause
0.5% increase in GDP of an oil consuming economy.
Back then in 2008 many of us had
faced recession, have seen higher price of Oil per barrel, Weak American
Economy, Strong Indian Rupee touching 36 INR for a Dollar. Now in 2014, increase in
American shale production gas has triggered a ripple that is sure to send fresh
waves, let us see which country will be on Crest and which country will be down
on Trough.
~ Sai Karthik
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