THE BREATHTAKING DECLINE

For the last two years, global oil prices have been in free fall, and no one seems to know when it will stop. In June 2014 you had to plunk down $110 to purchase a barrel of Brent crude. By early 2015 that had dropped to $60.

Today it costs even less to buy that barrel of oil — a level not seen since 2004. It's a breathtaking decline. People are literally throwing barrels of a plank.

Oil supply (in green) remains much higher than demand (yellow) — about 1.5 million barrels per day higher — with the excess getting saved for later in stockpiles (blue). And, the International Energy Agency said in January, that glut is currently expected to persist for the rest of 2016, keeping prices low: "Unless something changes, the oil market could drown in over-supply."

HISTORY OF THE DECLINEThis wasn't always the case. Between 2010 and 2014, oil demand was soaring around the world, as countries recovered from the financial crisis but global production was struggling to keep up. Many older oil fields were stagnating. Conflicts in places like Libya and Iraq were restricting supply. Countries had to draw down their stockpiles, and prices soared to around $100 per barrel.

Those high prices, however, spurred drillers in the United States to use innovative hydraulic fracturing and horizontal drilling techniques to unlock vast quantities of oil from shale formations in places like North Dakota and Texas. It's hard to overstate the impact of the fracking boom: US crude oil production has nearly doubled since 2010.

Eventually, supply caught up with demand — and then surpassed it. That's when the crash came.

By mid-2014, global demand was starting to slow down. Europe was still reeling from the euro zone mess. China's economy was starting to stumble. But the United States continued to produce more and more oil. Iraq and Libya were also starting to bring more production back online. So prices began sliding, down to $70 per barrel.

At that point, many people expected Saudi Arabia and other oil producers in OPEC to cut back on their own production to prop up prices, as they have in the past. (Conventional wisdom had held that Saudi Arabia needed $100 per barrel oil to balance its budget.)

Surprisingly, that didn't happen. Saudi Arabia decided to increase production in order to maintain its market share, hoping that the subsequent fall in oil prices would crush US, who require higher prices to stay profitable.

Ever since Saudi Arabia's decision to maintain output in late 2014, prices have kept tumbling and tumbling — to $50 per barrel, then $40, then $30 — largely because supply has remained strong and demand has been weaker than expected.

US drillers turned out to be far more adaptable to low oil prices than the Saudis thought, as companies cut costs and boosted productivity in order to keep the oil flowing. (US production has finally stopped growing over the past few months, but the decline has been far less severe than originally predicted.) Iraq has nearly doubled production since 2014 — to more than 4 million

barrels per day — as it recovers from conflict. Thanks to the nuclear deal with the US, Iran will start exporting more oil this year as sanctions are lifted, offsetting declines elsewhere.

In the meantime, major developing economies like China, Russia, and Brazil remain mired in a slump, putting a damper on oil consumption. An unusually mild winter helped suppress demand for heating oil. And a stronger dollar means that some countries now have to pay more for crude imports, which further limits consumption.

As long as supply far outstrips demand, oil prices will stay relatively low.

Cratering prices are having all sorts of ripple effects around the world. Car owners in places like the United States, Europe, and Japan are suddenly paying way less for gasoline, which means they have more money to spend on other things. (Arguably, low prices have helped bolster the US economy over the past year.) SUVs and gas guzzlers are coming back in style.

On the flip side, crude producers like Saudi Arabia, Russia, and Venezuela are struggling to balance their budgets and suffering from a major revenue crunch. Oil companies in the United States and elsewhere are watching profits evaporate. Banks that financed the US shale boom are reeling from a wave of defaults. Developing nations that previously relied on petrodollars for financing are now hurting. It's a major disruption.

The plummeting price of oil is still the biggest energy story in the world. It's bringing back cheap gasoline to the United States while wreaking havoc on oil-producing countries like Russia and Venezuela.

FUTURE OF OIL

The future of the oil prices is largely uncertain. Lots of bets are being placed in the financial markets on this regard.

Some banks project oil prices to keep plummeting down to $20 per barrel this year. Others expect a rebound to around $50 or $60 per barrel by year's end as the US shale boom tapers off and demand recovers.

In January, the IEA pointed out that prices could easily slide lower this year if Iran ramps up production faster than expected. "In a scenario whereby Iran adds 600 kb/d to the market by mid-year and other members maintain current output, global oil supply could exceed demand by 1.5 mb/d in the first half of 2016. So it’s very much possible that the price could go lower.

Ultimately, the supply and demand dynamic is the thing to keep an eye on. And expectations matter enormously here. Whenever new data shows an unexpected boost in oil production or an unexpected drop in oil demand, prices tend to go down. Conversely, a surprise drop in supply or a surprise surge in demand will push prices back up.

So if, say, the cold war between Saudi Arabia and Iran heats up and somehow leads to conflict that crimps production, prices could rise. If low prices are harder for the US shale industry to handle than anyone thought, that could also cause prices to rise higher. If China's economy suddenly rebounds unexpectedly, that could have a similar effect. Or maybe Iran will do something that causes EU and US oil sanctions to snap back into place.

Alternatively, perhaps the supply glut — and hence low prices — will persist indefinitely. It's a guessing game, and there are lots of plausible guesses.

The IEA significantly increased its projections of future oil costs in this year's report due to the changing outlook for demand and production costs. It now expects crude oil to average $100 per barrel over the next two decades and more than $200 per barrel in 2030, in nominal terms. Last year's forecast estimated that a 2030 barrel would amount to only $108.

Will there be a spike or glut? These are very possible but radically different scenarios.

GLOBAL IMPACTThe plunge in oil prices is having significant economic consequences around the world.

RUSSIA:

Russia's situation is getting the most attention these days. The country's is hugely dependent on oil and gas production — with oil revenues making up 45 percent of the government budget — and the sharp fall on prices has been ruinous.

Economists now estimate that Russia's GDP will shrink at least 4.5 percent in 2015 if oil says below $60 per barrel. The plunging price of oil has also caused the ruble's value to collapse — which is leading to panic inside Russia and a rise in inflation, as imports become drastically more expensive. Many Russians, worried that their savings may vanish, have been rushing out to buy cars and washing machines — anything that has more lasting value than currency.

So far, Russia's central bank has been struggling to deal with this crisis. On December 15, 2014, the country suddenly hiked interest rates from 10.5 percent to 17 percent in an attempt to stop people from selling off rubles. But those rate hikes are likely to slow the country's economy down even further.

IRAN:

Iran's economy had recently started to rebound after years of recession. The International Monetary Fund had been projecting that the country was on track to grow 2.3 percent next year. But that was all before oil prices started to plunge — a potentially precarious situation for the country.

One big problem for Iran is that it also needs oil prices well north of $100 per barrel to balance its budget, especially since Western sanctions have made it much harder to export crude. If oil prices keep falling, the Iranian government may need to make up revenues elsewhere — say, by paring back domestic fuel subsidies (always an unpopular move, at least in the short term).

VENEZUELA:

There's growing concern that the oil crash could cause Venezuela, another major oil producer, to default. The nation's economy — heavily dependent on oil revenue — is set to shrink some 3 percent this year and inflation is rampant.

SAUDI ARABIA:

There's no question that Saudi Arabia, the world's second-largest crude producer (after Russia), will suffer financially from cheap oil. If oil stays at around $60 per barrel next year, the government will run a deficit equal to 14 percent of GDP.

For now, however, the Saudis are toughing this out — and show no sign of trying to prop up prices as they have in the past. The kingdom has built up a stockpile of foreign currency worth some $750 billion, which it will use to finance its deficits. In December, the country's oil minister, Ali al-Naimi, said he didn't care if prices crashed to $20 or $40 per barrel, he wasn't going to budge from his position. "It is not in the interest of OPEC producers to cut their production, whatever the price is," he said.

That said, if low oil prices persist, Saudi Arabia may have to cut back on some of the social programs it had instituted after the Arab Spring. And Naimi's strategy of maintaining oil output is controversial within the kingdom. (In January 2015, Saudi King Abdullah died, but his successor Salman said he would maintain the current oil policy.)

THE UNITED STATES:

In the US, meanwhile, a fall in crude prices will have both positive and negative impacts. For many people, it will offer an excellent economic boost: cheaper oil means lower gasoline prices — which have fallen to $2.04 per gallon, the lowest since 2009.

The EIA projects that US drivers will spend about $550 less on gasoline in 2015 than they did in 2014, assuming prices stay low. That will give consumers more money to spend on other things.

But it's not all good news. Oil-producing states like Texas and North Dakota are likely to see a drop in revenues and economic activity. The falling price of oil is also putting severe pressure on Alaska's state budget. All told, oil prices are likely to be good for 42 states (in green) and bad for the other 8 (in red):

If the price drop lasts a long time, that could also spur people to start using more oil. Case in point: In recent years, high gasoline prices have spurred many Americans to buy smaller, more efficient cars. But if gasoline prices fall, bigger cars and SUVs could make a comeback.

IMPACT ON INDIA

Oil is one of the most important commodities in recent times. It greatly influences the functioning of the economy and India is no exception. Here are some of the ways in which the decline in oil prices have affected India:

CURRENT ACCOUNT BALANCE:

India is one of the largest importers of oil in the world. It imports nearly 80% of its total oil needs. This accounts for one third of its total imports. For this reason, the price of oil affects India a lot. A fall in price would drive down the value of its imports. This helps narrow India's current account deficit - the amount India owes to the world in foreign currency. A fall in oil prices by $10 per barrel helps reduce the current account deficit by $9.2 billion, according to a report by Livemint. This amounts to nearly 0.43% of the Gross Domestic Product - a measure of the size of the economy.

INFLATION:

Oil price affects the entire economy, especially because of its use in transportation of goods and services. A rise in oil price leads to an increase in prices of all goods and services. It also affects us all directly as petrol and diesel prices rise. As a result, inflation rises. A high inflation is bad for an economy. It also affects companies - directly because of a rise in input costs and indirectly through a fall in consumer demand. This is why the fall in global crude prices comes as a boon to India. Every $10 per barrel fall in crude oil price helps reduce retail inflation by 0.2% and wholesale price inflation by 0.5%, according to a Moneycontrol report.

OIL SUBSIDY AND FISCAL DEFICIT:

The government fixes the price of fuel at a subsidised rate. It then compensates companies for any loss from selling fuel products at lower rates. These losses are called under-recoveries. This adds to the government's total expenditure and leads to a rise in fiscal deficit - the amount it borrows from

Indians staying abroad sent $70 billion worth money back home in 2013, according to a report by The Hindu, a national newspaper. This is important because India uses this inflow to fund its current account deficit. Majority of this money comes from Indians staying in Gulf countries. A fall in oil prices could affect some of the oil-exporting Gulf countries. This could in turn affect the flow of money into India.

the markets. A fall in oil prices reduces companies' losses, oil subsidies and thus helps narrow fiscal deficit. However, since diesel was recently deregulated, the fall in oil prices will likely have less effect on the government's fiscal deficit. Moreover, the government still has to pay for previous under-recoveries. Any benefit from the fall will be offset by payments for the past under-recoveries.

RUPEE EXCHANGE RATE:

The value of a free currency like Rupee depends on its demand in the currency market. This is why it depends to a great extent on the current account deficit. A high deficit means the country has to sell rupees and buy dollars to pay its bills. This reduces the value of the rupee. A fall in oil prices is, thus, good for the rupee. However, the downside is that the dollar strengthens every time the value of oil falls. This negates any benefits from a fall in current account deficit.

PETROLEUM PRODUCERS:

The fall in global oil prices may be beneficial to India, but it also has its downsides. Directly, it affects the exporters of petroleum producers in the country. India is the sixth largest exporter of petroleum products in the world, according to media reports. This helps it earn $60 billion annually. Any fall in oil prices negatively impacts exports. At a time when India is running a trade deficit - high imports and low exports, any fall in exports is bad news. Moreover, a lot of India's trade partners and buyers of its exports are net oil exporters. A fall in oil price may impact their economy, and hamper demand for Indian products. This would indirectly affect India and its companies. For example, the share prices of Bharti Airtel and Bajaj Auto fell because of the devaluation of the Nigerian currency - Naira. Both the companies have a significant presence in the African country.

CONCLUSION

Based on the above-mentioned facts, I believe that the oil prices will continue to fall because nothing is being done to redeem the excess supply of oil. The OPEC will continue to produce oil despite the excess supply. They are only concerned about maintaining their market share and are willing to sell the oil even at $20 per barrel. They believe that their reserves are enough to sustain their economy even if the market crashes because of the falling oil prices. This is the case in the short run, however in the long run the future of the oil prices is a guessing game. Experts believe that the occurrence of certain extra ordinary events can tip the scales in favour of the OPEC and the oil market can return to its former bloom.