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The global crude oil price has dropped in June 2014 that marked an end to the four year stability in high oil prices that began in the late 1990s (Kilian and Murphy, 2014). According to the study, the decline in oil prices between June 2014 and Jan 2015 is the third largest in the past 30 years since the oil producing nations participated in the international trade (Etornam and Denis, 2015). The changes in the supply as well as the demand conditions are important but there were other factors such as a significant shift in the policy objectives of the Oil Producing and Exporting Countries (OPEC), less spillover of the geo-political risk factors and the appreciation of the US dollar (Reboredo and Rivera-Castro, 2013). The low oil prices within the economy would have a significant impact on the growth as well as the inflation. Moreover, weak oil prices are also expected to result a shift in the significant real income from the oil exporting countries to the oil importing countries (Baumeister and Peersman, 2013). The research aims at evaluating the impact of the fall in oil prices on the supply of crude oil by the petroleum exporting nations. It also provides the researcher with the scope to understand the causes for the fall in global crude oil prices.

Causes for the sharp decline in Oil Prices

The demand and supply conditions decides the long run trend for the oil prices, but in the short run, the expectations leads to the price fluctuations within the economy (Kilian and Lee, 2014). The expectation play a key role in the rise in demand for crude oil in the global market because, the countries expecting that the price of crude oil would rise in future would have high demand for crude oil in order to store it for future use (Singleton, 2013). On the contrary, there is a fall in the demand for crude oil in case the oil importing countries expect that the price of crude oil would fall in the future. The fall in price of oil was marked from $108 per barrel to $80 per barrel (Dube and Vargas, 2013).

Figure 1: Fluctuations in Crude Oil Prices with respect to GDP
(Source: Cashin, 2014)

However, the researchers have analysed that the sudden decline in the oil prices is due to the increase in supply of crude oil by the oil exporting countries. The production of crude oil has doubled in the recent years and as a result, the global oil supply growth has outweighed the global oil demand growth in the economy (Wang and Chueh, 2013). With the production of around 36 mb/d of which 30 mb/d is subject to the quota, as per the study, OPEC comprises of the 40% of global supply of crude oil and the supply is expected to rise in future (Chapman, 2014). The change in objectives of the oil production by OPEC is expected to increase the supply and the price would fall further. The political conflicts in the Middle East and Eastern Europe had a severe impact on the oil prices. However, after the conflicts, the development took place in the Middle East that lead to the rise in production of crude oil. There are several other factors that affect the fluctuations in the crude oil such as the seasonal weather conditions that has an impact on the demand for crude oil and in turn, the prices are affected (Baumeister and Peersman, 2013). During the summer, the use of gasoline increases which in turn raises the demand as well as the prices for crude oil. Crude oil is also demanded during the winter but a mild winter leads to fall in oil prices (Hesary, 2013). The production decision made by OPEC is another factor that affects the crude oil prices that in case of a rise in the production levels, there would be a fall in the oil prices. The capacity of OPEC to meet the rising demand for crude oil in the global market would accelerate the production as well as generate a greater output (Hesary, 2013). Moreover, fall in marginal cost of production leads to a fall in the crude oil prices. However, the cost of production is based on the cost of inputs used. In case of offshore oil producers, the tight regulations have an impact on the oil prices within the economy (Hesary, 2013). The technology also plays a key role in the production of crude oil and the cost of technology affects the crude oil prices. Nonetheless, better technology helps in producing large amount of oil and as a result, due to excess supply of oil in the global market, there occurs a fall in crude oil prices in the economy (Hesary, 2013).

Impacts of fall in Oil Prices

The fall in oil prices has a negative impact on the oil producing sectors in the global economy. The study suggests that the combination of the supply as well as the demand for crude oil resulted in the sharp fall in oil prices (Cashin, 2014). UK is the largest producer of oil, whereas, the European Union is the second largest producer of oil in the global market. However, if the low oil prices prevails for a long period of time, then there would be a strong impact on the economy as the oil producing nations would fail to generate revenue from the production as well as export of oil to other countries (Cashin, 2014).


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