A trip to the petrol pump has become a happy affair for all, as fuel doesn’t burn ones pocket as it used to, and we all know why – falling oil prices.
But as oil prices hit rock bottom, it has much deeper implications than what we see on the surface.
Why the drop in prices?
Though it depends on a lot of factors, the core issue is demand and supply.
With technological advancement, a new method, fracking, has enabled companies to extract oil and gas which was earlier inaccessible to them. Thanks to fracking, US oil production doubled and domestic stock hit an 80-year high. The industry grew to be on par with Saudi and this has resulted in countries, which once exported oil to United States, to compete for markets in Asia.
Even international relations and politics play a role in the present glut. With sanctions being lifted, Iran turned on their oil taps, further increasing the global oil production. Being arch rivals, Saudi further stepped up production despite falling prices, so that Iran will take a hit.
This and many other factors led to a glut in the supply of oil. But the demand was lagging and thus prices dropped.
Who has lost out?
Many companies who had taken huge loans betting on the high oil prices in the last decade were hardly hit. In 2015 alone around 42 oil and gas companies in the US failed and the number is expected to go up this year.
This forced companies to cut down costs and about 2,50,000 oil workers lost their jobs. Many oil producing states are facing economic and political turmoil due to the falling prices.
Who has gained?
But it is the developing countries that are reaping the benefit of the dip in oil prices. For a country like India, where fuel is sold below market rates through subsidies, government can do away with subsidies without a spike in fuel prices. This can save crores of rupees to the government and this in turn can help strengthen the economy.
Also as fuel price drops, prices of other commodities will dip and this can tame inflation and also accelerate growth.
Analysts believe that it will take a long time for oil which is now available at $40 a barrel, to bounce back to $90 or $100, which was common during the last decade.