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    How falling international oil prices are affecting Bangladesh

    LightCastle Analytics Wing

    The plummeting price of oil is, at present, the most sensational energy story in the world. For much of the past decade, because of soaring oil consumption in countries like China and conflicts in key oil nations like Iraq, oil production could hardly cope with the demand-thus causing prices to spike. But many of these dynamics were rapidly shifting, till prices dropped steeply in September 2014. While wreaking havoc on oil-producing countries economies, this is proving to be a boon for oil importing countries including Bangladesh. 
    Current Scenario:
    Organization of the Petroleum Exporting Countries (OPEC) controls nearly 40% of the world oil market. Since they failed to reach an agreement at their meeting in November 2014, oil prices have fallen to about $60 per barrel in January from $115 last June.
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    Reasons for declining oil price: 

    1. Low Demand: One of the main reasons for the current situation is low demand. Implementation of new efficiency measures in formerly top oil consuming countries, combined with weak economic activity, and a budding shift from oil to other fuels has led demand to hit a record low, falling short of previous forecasts.
    1. Boom in unconventional oil production: In 2014, as oil prices soared, companies found it more profitable to extract oil by unconventional methods. Companies in USA began using techniques like fracking and horizontal drilling to extract oil from shale formations in North Dakota and Texas. Meanwhile, in Canada, companies started heating Alberta’s oil sands with steam to extract usable crude. Since 2008, The US alone has added 4 million extra barrels of crude oil per day to the global market, compared to global crude production of about 75 million barrels per day.
    1. Steady Supply from fringe players: The output of Iraq and Libya has remained steady at a combined 4 million barrels a day despite ongoing geopolitical turmoil in those regions. Combined with the sharp reduction of America’s oil imports, supply has swelled.
    1. Competitive Dynamics: Saudi Arabia, the world’s second largest crude oil producer, along with other OPEC countries, could cut back production to prop prices back up. But the country is of repeating history – while facing a similar situation in the 1980s, this policy only succeeded in lowering its market share and adversely affecting its economy. Since its $900 billion in foreign-exchange reserves enables it to absorb the effects of the low oil prices in the short term, keeping its production rate unchanged and holding to its existing high market-share seems to be a safer alternative to Saudi Arabia. Besides, the expensive shale oil extraction process in US requires higher prices of oil in order to break even. So OPEC hopes that the falling price of oil would help throttle the US shale boom, spurring up prices and restoring the previous high prices.

    Impact on global economies:
      Russia, a top oil exporter and producer, loses about $2bn in revenues for every dollar fall in the oil price, and its economy would shrink by at least 0.7% in 2015 if this trend continues. Venezuela faces a similar predicament. Saudi Arabia, on the other hand, despite needing oil prices to be around $85 in the longer term to break-even can withstand lower prices in the short term. Plummeting oil prices should help lift emerging Asia’s GDP growth this year to 4.7% from an estimated 4.3% in 2014. Sliding prices offer a unique opportunity to countries like India and Indonesia to spend on much-needed infrastructure and growth projects without fueling inflation. Also, China, which spent $234.4 billion on oil import in 2013, will experience a major boost to its waning economy- a 30% fall in oil prices would lift its GDP by about 1% next year. In fact, every dollar drop in oil prices helps reduce the government’s burden of subsidy payments by $1 billion.
     Possible impact on Bangladesh economy

    1. Facing Cash crisis of BPC: From 1999, Bangladesh Petroleum Corporation (BPC) has been incurring losses every financial year. It has current outstanding debts worth BDT 40 billion which had kept on increasing before the latest spate of oil price fall.

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    Source: BPC (2012)

    But this liability is gradually shrinking since BPC is making a profit against sale of all petroleum products due to the drop in international oil price and no consequent drop in domestic price. As oil prices continue to slip in the international market, Bangladesh could save a staggering USD 1.5 to 2 billion this year- money that is spent annually to subsidize oil imports.

    1. Low Storage Capacity: Bangladesh’s annual import of oil stands at around 5 million tons. More than 400,000 tons of oil arrive in the port each month. However, the storage capacity of the country is only 913,000 tons for meeting demand of only 1-2 months.
    1. Investment opportunities: The savings gained due to drop in oil price serves as a great opportunity for a developing country like Bangladesh for investing in rural infrastructure- in sectors such as agricultural research, roads and new technologies. This could significantly benefit the poorest segments of the country. Government may decide to reduce domestic fuel costs aligning with international market, which may yield the following benefits for the economy. 
    1. Transportation costs and Inflation: Lowering domestic oil price can also make a positive impact on the Bangladesh economy in a number of ways. It would, for example, lower fuel and transport costs. Also, retail electricity prices in the domestic market would fall, ultimately helping to reduce inflation and therefore reduce the cost of living. The net effect would be a rise in the overall standard of living.
    1. Rental Power plants: Most of the BDT 120 billion spent per year as subsidy BPC goes to the quick rental power plants. For these power plants, aviation firms, paint factories, private companies and basically any company which uses crude oil as a vital input, a drop in domestic oil price would have a direct positive affect.

    Projected future trends of Oil Price:
    In its annual World Oil Outlook, OPEC has cut its forecasts for both the price growth and global demand for oil, predicting a small decline in real values over this decade in addition to a constant nominal price of $110 per barrel between now and 2020. In the medium term, forecasts for prices in the U.S. were raised and those of the “BRIC” countries (Brazil, Russia, India and China) were shrunk. In the long term, however, global oil demand is expected to increase by around 21 million barrels per day to 111.1 million b/d by 2040. Developing countries will grow by 28 million b/d, while the more mature economies in the Organization for Economic Co-operation and Development will essentially see consumption plummet by over 7 million b/d.
     Latest Commodity Forecasts published by The World Bank predicts that in 2015, world crude oil price per barrel will fall to $50.3, while issued spot average price per barrel for crude oil is expected to fall to $56.7 by IMF.

    pic 3Sources: World Bank Commodity Forecast Price data, January 2015; IMF Commodity Price Forecasts, January 2015; EIU Economic and Commodity Forecast, February 2015

    The World Bank forecast is shown on the chart above along with those of IMF and EIU. The World Bank estimates are more conservative, with forecasted prices hovering under $65/barrel in the next five years. On the other hand, EIU shows a forecasted price growth to $93.8/barrel by 2018- almost equal to that of last year’s. IMF estimates show significant rise in 2017, followed by steady growth in later years.
    The sliding oil price opens up many exciting possibilities for Bangladesh. If possible, infrastructure for strategic oil reserve as contingency measure of managing crisis must be set up. To deal with shortage of storage facility, Bangladesh may consider storing in offshore reservoirs (Singapore or elsewhere). However, in order to reap maximum benefit from falling oil prices, extensive study, research and sound implementation plan must be invested in.
    Research conducted by Tasmia Tabassum, Junior Associate, LightCastle Partners.
     

    LightCastle Analytics Wing is the research division of LightCastle Partners. It is tasked with producing periodic reports on the different sectors of the economy, analyzing trends in markets and making methodical, thorough and intelligent analysis to improve strategy and drive business growth.