Over the past year, oil prices have experienced the largest drop
since the 2007-2009 recession. Throughout the mid-2000s oil prices
fluctuated around the psychological benchmark of $100, whilst today
it seems that $30 per barrel is the new reality. Indeed, according
to market forecasts1 for 2016, companies and investors
are preparing for another year of strain.
Figure 1. Weekly crude oil prices: WTI, US$ per barrel Source: U.S. Energy Information Administration
There are several prominent reasons why further drops in oil
prices can be expected in the near future. First, this price drop
is very different from the demand-induced oil crisis of the
One of the unexpected triggers was caused by OPEC, which
increased oil production at the beginning of the drop in oil
prices, rather than decreasing it. Meanwhile, producers in the U.S.
and Russia proved much more resilient than expected. For example,
despite the reduction in U.S. oil production in spring 2015, its
annual production level showed multi-decade highs. According to
official data, on average since October 2015 the U.S. produced 9.3
million barrels each day. Canada, Russia, China and Norway all are
expected to post annual production gains this year, according to
the U.S. government's Energy Information Administration.
The second reason is the slowdown of Chinese economic growth,
which continued to slow in the third quarter of 2015 and is nearing
its slowest pace since the global financial crisis2. The
recorded GDP growth rate in the third quarter of 2015 reached 6.9%,
the first time since the recession that economic growth in China
fell below 7%. This slowdown of Chinese economic growth triggers
additional concerns about the world economic outlook.
Finally, the struggle for the market share between Iran and
Saudi Arabia may add further impetus to the plummeting of oil
prices. Iran is back on the international market following the
recent lifting of western sanctions. Furthermore, recent evidence
shows that Saudi Arabia has an excess production capacity of 2.5
million barrels per day, which is double the supply it released
onto the oil market last year. This may signal Saudi Arabia's
willingness to keep up with low prices and foreign reserve cuts to
protect its share in the oil market. In addition, Saudi Arabian Oil
Co., better known as Saudi Aramco, has recently announced that it
is considering the possibility of going public by listing in
capital markets. Aramco produces more than 10% of the world's
oil supply every day and controls a large chain of refineries and
petrochemical facilities. According to preliminary forecasts, its
value may be in excess of $10 trillion. The IPO of Aramco may have
a number of implications for the prospects of the oil market. For
instance, U.S. producers may potentially lose the competition to
this listed giant.
Overall, declining oil prices have several direct and indirect
implications for the Central Asian economic outlook in the medium
term. Firstly, with the falling oil prices, Russia is close to a
recession with a contraction of 4.3% in the third quarter of 2015.
As a result, the ruble has been very volatile, placing additional
pressure on the basket of Central Asian currencies, especially the
Secondly, with Kazakhstan's accession to the World Trade
Organization this year, the economic prospects of the Eurasian
Economic Union look very gloomy. Kazakhstan may consider shifting
its attention to WTO member markets. In this vein, the slowdown of
its neighbour and key partner, China, suggests that demand for raw
materials from Kazakhstan will face a decline. The devaluation of
the tenge did not yield the anticipated results for the private
sector, as cheap labour costs and investments in the resource
sector, for example the Kashagan oil field, faced the near-collapse
of oil prices.
The table above shows that over the past two decades a 10%
increase in average annual oil prices correlated with a 1.4%
increase in the average GDP growth rate of Kazakhstan. Therefore,
the alarming trends and forecasts of global oil prices may well
drive the Kazakh economy into a deep recession.
1. USEIA (2015)
2. WSJ (2015)
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