World oil prices dropped to their lowest levels in more than a year Thursday as Saudi Arabia, one of the world's largest oil producers, showed no signs of cutting its production to ease the glut in the global supply.
Riyadh earlier in the week cuts its official crude oil selling price for the fourth month in a row, signaling it is looking to keep its world market share and compete on pricing with other big producers.
The price for Brent crude from the North Sea fell to as low as $91.55 a barrel, it lowest point since June 2012, before recovering by more than $2 a barrel.
A sweet grade of oil traded in the United States, West Texas Intermediate, dropped below $90 a barrel, its lowest point since April 2013, although it marginally recovered in later trading on November contracts.
Analysts predict oil prices could fall further as long as production in major drilling areas across the world is not trimmed.
World oil prices have been falling for several months as Libyan oil production has resumed and the value of the U.S. dollar is at a four-year high against other currencies. The strong U.S. dollar makes oil more expensive for weaker currencies, which in turn cuts demand for oil.
Recent turmoil across the Middle East has scrambled long-held political alliances among some of the group’s most important members. The U.S. shale-oil boom is robbing OPEC of one of its best customers and contributing to a glut of non-OPEC oil sloshing into world markets. And breakneck economic growth in Asia—which buoyed oil prices amid downturns in the U.S. and Europe—is slowing.
All of this has helped drive global prices sharply lower since the summer. In the past, OPEC has typically moved collectively—in such situations to boost prices, either slashing output or threatening to do so. Many inside and outside the organization doubt whether the group can do much amid its current disarray.
The drop in prices is particularly worrying for OPEC producers in Latin America and Africa that depend on oil revenue to support high spending, as well as Iran, where trade is crimped by international sanctions.
Lower prices may not worry many Western nations. Industrialized oil-consuming countries have long criticized OPEC as acting to keep crude prices high to line OPEC governments’ coffers.
But the OPEC disunity also threatens a global safety net. OPEC members—which pump more than a third of the world’s daily supply—have acted in the past to keep a lid on prices amid big supply disruptions, as they did ahead of the U.S.-led invasion of Iraq in 2003.
OPEC members are sitting on unused pumping capacity of some 3.8 million barrels a day, equivalent to 4% of global oil supplies, according to the International Energy Agency—spare capacity that could generally be called upon quickly in a pinch.
“If there is a supply crisis, OPEC is the only group that can stand up and respond,” said John Hall, chairman of British consultancy Alfa Energy.
As the boom in U.S. oil production has curbed American fuel imports, OPEC members have relied more on customers in Asia. But with growth in Asia’s economies and oil demand leveling off, OPEC members have started competing against each other for market share, often leading to price competition.
Last month, Saudi Arabia and Kuwait both cut their October prices for Asian buyers, according to Gulf oil officials and traders, effectively undercutting the U.A.E., a Persian Gulf neighbor and fellow OPEC member. In the past, such cuts would have been taken collectively among Arab Gulf OPEC members.
“There is a price war within OPEC,” said Amy Myers Jaffe, executive director of energy and sustainability at the Graduate School of Management at the University of California, Davis. “It is the most fractured I have ever seen OPEC.”
Like the situation in the US, falling oil prices are also a double-edged sword for Britain’s economy and investors. Although George Osborne, the Chancellor, is less reliant on tax revenues from the North Sea than some of his predecessors, prices are approaching the point when many of the developments planned offshore west of Shetland by international oil companies could be placed on ice.
A sharp drop-off in domestic oil production and associated tax receipts from the North Sea would give Mr Osborne an unwelcome hole to fill in the government’s public finances heading into next year’s general election. However, falling oil prices will help to keep inflation low.
For Britain’s motorists the current declines have been good news that has trickled through to the price of petrol on forecourts. A litre of unleaded petrol in the UK has fallen a few pence over the past month to an average of around 127.21p on average, a figure last seen in 2011, just before Mr Osborne raised the value added tax on fuel to 20pc, from 17.5pc
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