During 2013 and before June 2014, I had asked — more than once — what was keeping oil prices at the level they were. The answer was almost always reliant on the geostrategic situation and the problems in many a producing country.

Oil demand growth was modest in recent years when supplies were increasing, more so in the non-Organisation of the Petroleum Exporting Countries (Opec) areas. Economic problems and low growth in Europe, the slowdown in China and the strong dollar added to the pressure on oil prices, while the geostrategic situation, while worsening, took a back seat.

When Opec decided late last month not to reduce its production ceiling, prices plunged. As if this was expected within industry circles, prices had been declining since their highs in June.

Opec and other oil producers were misled by the relative stability in the market for almost four years, with prices moving in a narrow range around the $110 (Dh404) a barrel average. This was taken for granted as the level that both producers and consumers are happy with.

But Opec production since the end of 2011 was persistently higher than its ceiling of 30 million barrels a day, and always higher than what was conventionally dictated as the call on Opec oil. Therefore, Opec itself contributed to the oil glut, combining it with increased production from shale and tight oil, oil sands, deep sea oil and so on.

The oil price level this year is unlikely to affect any of the producers as the average price of Opec was $105.87 a barrel in 2013 and in 2014 would be close to $97. Therefore, Opec revenues would decline from $900 billion in 2013 to about $703 billion in 2014, and if prices continue at the current level would be around $446 billion in 2015, according to estimates by the Energy Information Administration.

Such a precipitous decline in revenue would have untold consequences on Opec members although some of them may be able to ride the crisis for a few years due to the savings made in previous years. But barring those already undertaken, no expansion in production capacity can be expected soon, while some downstream projects may be cancelled or put on hold.

The impact on the global oil industry is too early to foresee, though reduced investment in exploration and production is very much expected. The BBC on December 10 said that “Falling oil prices threaten to transform the industry” as it pointed out that BP “is to accelerate its redundancy programme”. BP is also reported to be discussing a merger with Shell, and such deals are known to accompany periods of soft oil prices. The smaller companies may do so more urgently to pool resources at a difficult time.

Analysts at Morgan Stanley “warned that oil could fall to $43 a barrel in the second quarter of next year [2015] unless oil producers’ group, Opec, bolsters the price by cutting production”. Since Opec is unlikely to do so, judging by the statements from Ali Al Nuaimi, the Saudi oil minister during the Arab Energy Conference in Abu Dhabi last week, the downside to further oil price decline remains.

Drilling in high-cost places such as the deep sea and the Arctic may grind to a halt for now, or slowed down if already committed. Service companies Halliburton and Baker Hughes have already confirmed they are in merger talks.

Project delays and budget cuts in Canada’s oil sands region are already under way, as this processing is an expensive proposition.

However, US drillers are not yet ready to cut back, and the number of drilling rigs reported by Baker Hughes is still rising. Whether the reduction in costs due to efficiency and advances in technology can be sustained remains to be seen.

The Russian economy is caught out by sanctions and the oil price fall and many projects to raise capacity may not go ahead. But Russia is unlikely to cut production according to Energy Minister Alexander Novak when he said, “If we cut, the importer countries will increase their production and this will mean a loss of our niche market”.

The general thinking that the fall in oil prices is good for the world economy remains to be seen as some major economies are concerned about deflation and falling stock prices. We have not yet seen the end of this story and more time is needed to assess the position of producers and consumers alike.

One thing is for sure — the decline in oil prices usually results in the wiping out of production surpluses. Producers may then be in the driving seat again.

CREDIT: The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.