Oil prices have plunged through another psychological barrier

Don’t cheer quite yet.
Don’t cheer quite yet.
Image: Reuters/Faisal Al Nasser
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This story has been updated with the Oct. 10 oil price in Asia.

Global oil prices today fell below $90 a barrel—good news for the global economy at a time of fears of a renewed contraction, but a risk for Saudi Arabia, whose unremitting war for market share is one reason for the plummet.

The price of the internationally traded Brent benchmark fell to $89.46 in after-hours trading, about 22% lower than its 2014 peak of $115.71 on June 19. [The plunge continued on Oct. 10, falling as low as $88.11 in Asia.]

US and European GDP could get a lift if oil prices stay this low for awhile, which is not far-fetched given projections of a continuing US oil production surge in 2015. Andrew Kenningham of Capital Economics tells Quartz that the $25-a-barrel drop, if it lasts through all of 2015, would boost US GDP by 0.5% as motorists apply the savings toward other kinds of consumer spending.

But analysts are split as to whether relatively low prices will persist. Some say OPEC will reduce its own production—perhaps as early as its next scheduled meeting, on Nov. 27 in Vienna—and thus undercut the US supply surge and send prices back up.

But others say we are in the midst of a price crash. Philip Verleger, an independent oil analyst in Colorado, says that crude oil prices have experienced a more than 30% drop 11 times since 1981, on each occasion because of sluggish global economic growth and increased production from a source outside OPEC. “The same elements are present today,” Verleger says.

Oil prices have averaged over $100 a barrel for three years running because of fears about global scarcity, but international energy agencies are forecasting another spike in US oil production next year, to 9.5 million barrels a day, which would be 11% higher than this year’s million-barrel-a day surge. The US no longer needs oil from West Africa; that supply has been diverted to Asia, where it’s collided with crudes from Saudi Arabia and Iran, both of which have cut prices to retain market share.

As of now, the global price plunge is hewing closely to levels the Saudis are said to want. The Saudis typically haven’t stated their policy in a straightforward way—instead, they say they are selling their oil for $1.05 lower than the average of two oil benchmarks—Oman and Dubai crudes. Doing the math, the average of November futures for the two grades was right at $90 today.

Phil Flynn of the Price Group says oil can go lower still. “Iran is lowering its oil prices after the Saudis did it, and Russia is raising production. If stock prices continue to fall, oil could crash to $85 Brent,” he tells Quartz. Prienga’s Steven Kopits said, “Supply is outpacing demand.  I think it’s likely to fall more before it corrects.”

The question is how low and how long. If such prices persist for years—and especially if they really crash—the Saudis will have to dip into their cash reserves, turning a bid for market share into an economic drain; and Russia, already under pressure because of Western-led sanctions, would encounter trouble much faster. Saudi Arabia is said to need $92-a-barrel oil to meet its state budget. Russia’s requirements are greater—between $100 and $117 a barrel.