Thursday, February 18, 2016

A Look at the Impact of Falling Oil Prices

Much has been made about the recent drop in oil prices. Many people in the United States thought that they would never see gas below $2 a gallon again. However, gas prices are now well below this benchmark, and they continue to decline.

The national average price for a gallon of gas is $1.88, as of January 19, according to AAA’s Daily Fuel Gauge Report. The figure is down sharply as compared with the last 12 months, although gas prices have been falling for longer than that time.

Effect on Businesses

While consumers may be happy paying less for gas, businesses are feeling the effects in a decidedly less positive manner. The New York Times
reports that roughly 250,000 oil workers have been laid off. Two-thirds of oil rigs have been decommissioned, and sales of oil production machines are down sharply.

While these numbers may seem shocking to many, a look at just how much oil prices have fallen shows why businesses in the oil industry have taken a serious hit. According to the New York Times, oil prices have fallen by more than 60% since June 2014. Current prices are at their lowest level in 12 years, in spite of the considerable inflation that has occurred during this time period.

Only a few short years ago, oil prices were $90 or even $100 a barrel. The price for a barrel of crude oil is currently about $28. The precipitous decline was unforeseen by the majority of analysts, as most expected OPEC (Organization of the Petroleum Exporting Countries) and other similar organizations to continue managing the supply of petroleum in such a way that prices remained high.

Too Much Supply

However, these organizations have failed to manage the supply as well as they did in the past. Over the last few years, oil production has risen sharply, particularly in the United States, Canada, and Iraq. Part of this increase in supply can be attributed to the advent of fracking in North America. The increased oil production in Iraq is frequently cited as an effect of the somewhat more stable political situation in that country.

The rise in oil production has begun to tail off, but the available evidence indicates that this will not immediately result in a large decline in oil prices. Stockpiles of petroleum products have increased to such a degree that there is more than enough oil for the long term, according to the New York Times.

Although production has begun to level out, there is further evidence that it will pick up again. New technologies are being developed across the industry, especially with regards to the practice of fracking. Moreover, the Gulf of Mexico and the oceans of Canada are expected to yield a great deal more oil in the future, as many drilling projects progress and new projects begin.

Decreased Demand for Oil

Another important factor in the drop of oil prices is the level of demand. With cars becoming more fuel efficient and the global economy remaining weak, demand is significantly less than had been projected in years past. To put it simply, fewer people are buying cars, and those who are on the road use less gas. The trend of fewer cars being sold is expected to end once the global economy improves. However, the fuel efficiency trend is only expected to accelerate.

Is the decrease in the price of oil good or bad? The answer is that it depends on one’s point of view. As with all major market forces, the effects of the drop in oil prices are widespread and complex.

Positive Aspects of Lower Prices

The positive aspects of the decline in petroleum prices are more visible than are the negative. The drop in gas prices is welcome by most adults in the United States who buy gas on a regular basis. The reduction in heating costs has also been quite noticeable, as many homes in the United States are still heated with oil.

The decrease in gas prices is more helpful to those under the poverty line, as they have roughly the same heating and gas bills as everyone else, but have less income with which to pay these bills. The savings are especially important at a time when food and housing costs have risen sharply.

However, the drop in gas prices has also had negative effects. Countries that depend on oil, such as Venezuela, have been hit very hard. These countries often struggle with issues of poverty and income equality, and they are more affected by a bad economy than rich people. The decline in oil prices may even threaten political stability, if a country that relies on petroleum is forced to make cuts to social programs.

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