The Current Level of Oil Prices is Below the Equilibrium Value

Such a dramatic drop in oil prices can be explained by a combination of a few factors. Firstly, it is an overheating of the energy commodities market that was observed from the beginning of 2011 till the mid-2014. In the above period, oil prices were overrated and exceeded substantially the actual level of costs and demand. So, sooner or later a mineral market bubble was to deflate. At present, a trend of return to the equilibrium is being observed.

Secondly, slowdown of global economic growth rates is still registered. If in 2010 global economic growth rates amounted to 4.1%, in subsequent years the global GDP did not exceed 2.5%. A factor behind that trend was slowdown of economic growth rates of India and China which were drivers of global economic growth in previous years. If in 2010, GDP economic growth rates of India and China amounted to 10.6% and 10.3%, respectively, in 2014 both the economies demonstrated a 7.3% growth of GDP.

Thirdly, in the past few years, developed countries embarked on the way of upgrading energy efficiency and development of alternative energy sources and the above measures have triggered a drop in demand on crude oil. Fourthly, in the period of high prices on oil primary sector companies made huge investments in the mining industry: new technologies were introduced and production processes modernized to increase the output of oil and the amount of reserves, so there is surplus of oil at present.

Fifthly, raising by the US Federal Reserve of interest rates and giving up by the US of the quantitative easing policy which limited the influx of new liquidity to the market had an adverse effect on prices on energy commodities. So, a number of independent factors overlapped and produced an excessive downward effect on the cost of energy commodities.

It is quite obvious now that the current level of oil prices is below the equilibrium value. In terms of the long-term development, such prices do not suit any exporter-country. A low level of prices cannot be a motivating factor for consumer-countries, either. It is rather difficult to forecast how strong the downward trend is going to be and when oil prices kick back.

Sergei Drobyshevsky, Academic Director of the Gaidar Institute