Home > News > The Fall of Oil Prices

The Fall of Oil Prices

Paul Buckley ’17

Staff Writer

Oil is not cheap to produce and with constant geopolitical issues in the Middle East and Ukraine driving up prices, there’s always a chance that the $3.10 a consumer is currently spending for a gallon of gas can be thirty cents more expensive in just two weeks.

While traditionally, when one thinks of oil they think of the Middle Eastern countries of Iran, Saudi Arabia, United Arab Emirates along with South American nation Venezuela and myriad of others, in recent years a push for US based fracking has led to exponential growth in US field production of crude oil. The US has experienced a nearly 1.5% increase from a 60 year low in 2008 of 5 million barrels per day to 7.4 million in 2013. Thanks to this increase in production, the US is on par production wise with Russia and Saudi Arabia and is poised to pass them in the foreseeable future.

What does this all mean though; why does it matter that the US has ramped up production and is on pace to exceed the traditional powers? Supply and demand is one of, if not the main concept in economics and when it comes to oil these increases in production have driven supply through the roof. Unfortunately for some oil producers, supply has moved at such a rate that global demand cannot keep up with the high rates of production leading to a surplus. Typically the economic benefits of a drop in oil prices would be seen as a boost for domestic and global growth, however in this case there are a number of factors to be wary about.

For the US, lower oil prices can be seen as a positive boost for consumers, especially lower income households who are on a tight budget. According to Merrill Lynch, consumers are likely respond to the dip in prices in a positive manner as it will free up cash which in turn is expected to be redirected towards other parts of the economy. On the other end of the spectrum for the US, decreasing oil prices can spell disaster for producing states such as Texas. The US has experienced a huge boom in oil production over the past 20 years and Texas has seen their GDP rise dramatically as a result of that. If demand doesn’t rise back up and prices continue to drop, producers could face the possibility of cutbacks, which includes lower production, and due to lower production, fewer jobs. However, this is a worst case scenario and whether or not US producers will pull back on production any time soon is still up for debate.

In the mean time, as prices dip into the lower 80s, expect the continued drop of gas prices too. The average national price for a gallon of gas has already dropped almost 35 cents over the course of the past month and as the supply function keeps shifting to the right with further increased production, expect to keep racking up the savings.

 

 

 

Leave a Reply