Plummeting Oil Prices: Who Stands To Gain?

As this piece is being written(0400GMT), the global benchmark Brent crude fell to a six-year nadir of $46.24 a barrel, the lowest since March 2009 amid forecast by top investment banks including Goldman Sachs warning a further dip to $40 a barrel where it may stay for most of the first half of this year. The oil prices have now fallen by more than half since June, when they stood at $115 per barrel.

A slew of reasons are cited for the steep fall in oil prices. Production from North American shale companies has increased the supply of oil and gas, dragging prices down. Slowing global economic demand and a surging dollar against a range of global currencies are two other key reasons why oil prices have declined significantly.

Usually when oil process dip, OPEC, the oil producing countries' cartel, responds with a cut in output, thus boosting prices. However, at its most recent meeting in November, top oil producer Saudi Arabia coerced other member countries to retain oil output at the current levels, pushing oil prices further down. The surprising move by Saudi Arabia was triggered by a convoluted reason. It’s relatively cheap to pump oil out of Middle East countries including Saudi Arabia and Kuwait. But it's more expensive to extract oil from shale formations in the US.

Therefore a continued fall in oil prices will make US oil production unprofitable, and hence, should push some of the US oil producing firms out of business. The subsequent dip in production of US oil will then help stabilize prices. Essentially, Saudi Arabia simply doesn’t want its market share to be hurt even at the cost of falling prices and the subsequent effect on the country’s GDP.

Though OPEC member Venezuela subsequently said it will work with Saudi Arabia for a recovery in oil prices, no measures has been taken by the countries so far.

The increase in demand of oil in countries like China and conflicts in key oil nations like Iraq kept the oil prices high for much of the past decade (bouncing around $100 per barrel since 2010). Prices surged as oil production couldn't keep up with the rising demand.

High prices encouraged companies in the US and Canada to start drilling for new, hard-to-extract crude in shale formations in North Dakota and oil sands in Alberta, which slowly lead to a glut in oil production. At the same time, the oil demand in Europe dipped as its economy weakened. In addition, countries like Iraq started producing more oil which also added to the glut. As in any other demand-supply mismatch scenario, production soon overtook demand and by 2014, supply far outpaced demand, speeding up oil’s downward journey.

Low prices are good for oil consumers in countries like Japan or the US. But it will hit hard nations reliant on oil sales. For instance, it is estimated that Russia's GDP will shrink at least 4.5% in 2015 if oil stayed at $60 per barrel. Falling oil prices have also caused the ruble's value to collapse, triggering panic across the country.

There is concern that the oil crash could cause Venezuela, whose economy is heavily dependent on oil revenue, to default. Even Saudi Arabia who is in much better prepared could face serious problems if the oil prices continue to stay low.

For India, which imports 75% of its oil, the price fall will ease its current account deficit. The cost of India's fuel subsidies is also expected to fall by $2.5 billion if oil prices stay low.

Will global oil prices stay low is a question that is in the minds of industry watchers. A possible political turmoil in oil producing countries such as Iraq and Libya, a faster-than-expected growth in Chinese economy, an economic rebound in Europe and a decision by Saudi Arabia to cut production are among a few scenarios that may lead to a turnaround in oil prices.