Falling oil prices

Obama Administration's decision to allow US companies to start oil export is a game-changer for the global oil market

The trouble with falling global oil prices is that it makes the performance of governments look better than they really are. Former president Pervez Musharraf, for instance, was helped by the relative stability of global oil prices during much of his tenure, and the rise of unrest against his rule coincided perfectly with the rise in the price of crude oil. Prime Minister Nawaz Sharif looks set to experience a similar benefit, this time directly as a result of US government policy. The decision by the Obama Administration to allow US companies to start exporting oil after nearly four decades is a game-changer for the global oil market. The days of Saudi Arabia being the only swing producer in oil — and, therefore, having near-dominance in determining its prices — are over. The short-term impact of this decision will be relatively marginal and affect almost nobody outside the US itself. US oil prices have tended to be lower than global oil prices over the last several years due to the supply glut within the domestic US market. Now that American companies will be allowed to export some of the production, US prices will likely converge to global averages.

The long-term impact, however, is likely to mean an era of relatively stable, lower oil prices. US oil production has gone up by almost 50 per cent over the last decade largely due to the development of fracking — a term that refers both to horizontal drilling and hydraulic fracturing — as a means of producing oil. The nature of fracking is that it creates several small wells that come online very quickly but also see their production dry off relatively quickly, meaning that it is difficult to sustain a supply glut if the price goes below the marginal cost of production but also easy to ramp up production if there is a shortage. For countries like ours, this means a lower, more predictable price of oil. It also means a once-in-a-decade opportunity to reverse the disastrous policy of unaffordable energy subsidies that have crippled our energy, industrial and financial systems. We hope the Nawaz Administration has the good sense to use this opportunity wisely.

Published in The Express Tribune, January 8^th,  2015.

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