As the year is drawing to a close, the most frequently and critical question being asked all over the world is: “what will be the price of oil in 2016”. There are diametrically opposite views on the trends in oil prices, but as of now it looks as if the oil bears should win.

Why is that so important? Because, oil price will determine the size of the income redistribution globally. The trend in oil price would determine size of income flows and it will in turn should dictate how much growth can really happen in the next year and year after that. How it happens?

The drastic fall in oil prices from around $100 per barrel in early 2014 to just around $36 per barrel in December 2015 meant income redistribution to the tune of $2 trillion. That is, while the rich oil exporting countries, which were witnessing a tsunami of cash into their hands since 1973, are seeing falling revenues from oil sales.

Saudi Arabia, which has the largest reserves of oil in the world, depended on oil for its revenues and the cuts in its latest budget show what is happening. The budget receipts have gone down by 15% as the Saudi King announced the figures. Ever since oil prices started falling, it has been dipping into its foreign exchange reserves. It was around $724 billion in January 2015; this has touched $627 billion in early December. IMF predicts at the current rate, Saudi reserves will vanish in five years.

The oil price fall means that poor and middle income countries have to pay less and that is a gain in their income. Since these are poor countries, they spend most of their incomes and that additional spending would help spur local demand and economic activity in these wide range of countries.

One of the leading experts, Anatole Kaletsky, who knows the oil economics like the back of his palm, has predicted oil price trade to range between $30 a barrel to $50 a barrel at the height in an article in Project Syndicate earlier this month. This is because oil price would now become like any other normal pricing behaviour. That is, the marginal cost of producing the last barrel of oil will determine its price in the market.

Until now, oil was not being priced on marginal cost, because the market was artificially controlled by Saudi Arabia and other members of the OPEC cartel. Now with more production coming on to the market than the demand, the producers are coming round to marginal costs rather than an artificially high price through production control.

Why this has happened? The fundamental shift in oil market could happen as the United States came out with huge production from their shale resources and that brought down USA off-take from the global market. Coincidentally, China slowed down, which had emerged as the biggest sucker of oil for its domestic economy.

Now that China is slowing down, rather fast as its growth rate is set to plummet to around 6% this year from a target of 7.5 per cent, Chinese off take is falling. Additionally, environmentalist lobbies’ pressures are mounting to cut down on fossil fuels consumption.

The rough and ready estimates put the daily excess production of oil at over 1 million barrels per day and there is no prospect of that surplus evaporating over time. The oil producing countries realise that to maintain their income levels, they will have to go on pumping more oil and not cut back production. At least, Saudi Arabia has come round to that point of view and hence it is not cutting down its production.

The new threat to oil prices is again from another country which has the second largest reserves in Middle East, Iran. The country has for a decade been kept outside global oil markets by western sanctions and its oil resources were also neglected. Hence, until now its production capacity had also degenerated.

These capacities are being resurrected and fresh production is expected from Iran which will enter the global oil market.

It will of course be inescapable not to notice the oil bulls. Jim O-Neill, the former Goldman Sachs assets head, who has been following the oil scenario for as long as his professional life, predicts oil prices to rise. He had earlier predicted a $100 a barrel price when prices were just around half that level. O’Neill had last forecast oil prices to rebound.

It appears though that technology and innovation should hold key to oil’s future. It looks as though technology at last is making it possible to shift over to alternative energy sources. According to reports, solar power costs are fast coming down and are already within competitive range with fossil fuels.

The abundance of supplies and redundancy of fossil fuels is giving rise to a new theory as well. The theory of “stranded assets”. It is believed that a good part of known and proven oil reserves will now because useless assets and they will never be pumped up. These “stranded assets”, which are currently shown in the balance sheets of major oil producing companies, which has been used for financial engineering, would be worthless and this will impact the financial sector. That is, at least, what Mark Coney, governor, Bank of England had referred to recently. (IPA Service)