What Led to Oil Price Plunge?

What Led to Oil Price Plunge?What Led to Oil Price Plunge?

A senior Oil Ministry official outlined factors contributing to the oil price plunge.

Speaking in a televised roundtable on Tuesday night, Mehdi Asali, the ministry's director for OPEC affairs, added that a drop in oil prices was partly predictable, reported.

Asali noted that it was clear last summer that the unconventional US crude production will increase global supply and lead to a drop in oil prices. This made the Organization of Petroleum Exporting Countries to coordinate its production with supply, a solution that failed to reap benefits due to Saudi Arabia's non-cooperation.

"Despite some OPEC members' speculations about the US reducing oil production, American companies boosted output, as they were on the verge of bankruptcy because of receiving high-interest loans, coupled with low oil prices. Therefore, they had no choice but to raise production to make up for the deficits. This further lowered prices," he said.

Asali referred to "Iran's mistakes" as OPEC's rotating head in 2011, saying, "The organization committed a strategic mistake by determining a 30-million-barrel ceiling and allowing Iraq to enter the organization's quota system. These were Iran's faults. At the time, Saudi Arabia, knowing Iran is going to face severe sanctions, used the special conditions to the benefit of itself and managed to grab Iran's 1.5 million barrels per day and also Libya's 1 million bpd market share."

Considering some countries' "political greed" as a determining factor in oil slump, Asali said Saudi Arabia, Kuwait and Qatar earn huge revenues from oil exports, but this low-profit market is detrimental to themselves, as Saudis lose $180 million daily.

According to Bloomberg's report, Saudi Arabia has announced plans to cut government spending and reform its finances after plunging oil prices resulted in a record annual budget deficit of nearly $98 billion.

The 2016 budget, released by the Finance Ministry on Monday, marked the biggest economic shakeup in the world’s top crude exporter for more than a decade and includes politically sensitive reforms from which authorities previously shied away.

"Saudi Arabia possesses the largest crude reserves in the world and produces 10.5 million barrels per day, of which 7 million barrels are exported. This is while it stores about 380 million barrels of oil and oil-related products in South Korea and the Netherlands as a means of controlling the oil market," he said.

Asked about the prospect of oil prices, the official predicted prices would not decrease further, though crude prices will remain under $60 per barrel over the next few years.

"Last year, consumer countries have benefited the most from the oil crash. For instance, Americans bought 17 million automobiles in 2015 and the rate of travels witnessed a 2.5% increase," Asali said.

Sasan Shahveisi, an economic expert, also analyzed the issue from another perspective and said as oil prices were expected to rise because of instability in the Middle East, regional producers increased output and caused a market glut.

Reports say Iraq boosted oil production from 2.9 million bpd in November 2014 to reach 4.4 million bpd in September 2015.

"OPEC members are responsible for oil market conservation, a duty they failed to accomplish last year. Therefore, currently they have lost leverage to control prices," Shahveisi said.

Reza Padidar, a member of Energy Commission at Iran Chamber of Commerce, Industries, Mines and Agriculture, said more than 50 international companies are ready to cooperate, especially in the post-sanctions period, in developing Iran's infrastructures.

Underlining the role of Iranian private companies in pushing the country out of recession, Padidar suggested that in case the economy gains momentum, the government should first turn to local private companies and then employ foreign investment.