As oil price falls

At the time of writing this article (October 10, 2014) the price of crude oil is $85.82 per barrel (down from $92.4 per barrel seven days earlier), the lowest price since 2012.

Jordan, being an importer of 97 per cent of its energy and on the verge of commencing many energy related initiatives, should evaluate the impact on the region and itself, especially if the price of oil continues to fall (it is expected to reach $80).

The often-cited reasons for the fall in oil prices include both supply and demand elements. It seems that supply and demand factors are working together to cause oil prices to fall, with expectations of more drops in the near future. 

On the supply side, the US has been increasing its supply of oil since 2005 through hydraulic fracking or fracturing, a process of drilling oil and gas from rock formations far underground; the Iraqi oil supply is improving in spite of the Islamic State; Libya’s production is up from the 240,000 barrels a day to 810,000 barrels a day this month; and Saudi Arabia, the OPEC leader, instead of decreasing its supply to keep the prices high, offered a few days ago a discount of $1 per barrel to Asia and $0.4 to the US, thus signalling that it is increasing its supply.

Interestingly, the US is already an exporter of oil; it exports 400,000 barrels per day and its production is expected to reach over 13 million barrels per day by 2019, making it the world’s largest oil producer.

On the demand side, the EU and Chinese markets have not been doing as well as predicted earlier. Consequently, the demand for oil is lower than expected. 

While the US economy is continuing its recovery this year, other countries’ economies are not doing so well, showing signs of slowing down. 

The one factor that is not mentioned so far in the writings of the many analysts I reviewed is the strength of the US dollar.

The US economy has been on a recovery track, it is expected to grow at 4.6 per cent this year, the highest growth rate in 30 months, and unemployment is down from 7.3 per cent a year ago to 5.9 per cent this year.

Based on the strength of the US economy, the dollar has gained against major currencies, such as the yen and the euro. 

As the US dollar (and with it the Jordanian dinar due to the peg of 1994) becomes more expensive relative to other currencies, the oil prices fall. (The reverse is also true.)

Therefore, the continued strength of the US dollar should continue to drive oil prices downwards. Jordan has to evaluate the impact of falling oil prices on many fronts. 

On the one hand, the cost of energy at the current price level should fall by almost 15 per cent, so what is the looming budget deficit?

The result should be better than the one previously projected and hence, the government should start thinking of some reprieve from fee, tax and energy price hikes to consumers and producers. 

On the other hand, spending from the GCC funds should expand at an accelerated rate before the oil prices hit the GCC countries’ budget reservation or breakeven prices (around $80 for Saudi Arabia, $90 for the UAE and $70 for Kuwait).

Should prices reach these levels, Jordan would find it more difficult to expect aid from these countries as they hit their own budget crunches. 

Overall, Jordan should start depending on its own resources. To do so, it must develop its infrastructure, business environment, competitiveness and own resources.

Top among those is a resolution to the energy crisis by relying on our own reserves of shale oil and alternative energy sources, such as solar and wind.

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