Oil Prices:

Economics

Whats

Behind

the

Plunge?

Simple

The oil industry, with its history of booms and busts, is in a new downturn.
Earnings are down for companies that have made record profits in recent years, forcing
them to decommission more than half their rigs and sharply cut investments in
exploration and production. More than 100,000 oil workers have lost their jobs, and
manufacturing of drilling and production equipment has fallen sharply.
The cause is the plunging price of a barrel of oil, which has been cut roughly in half since
June 2014, reaching levels last seen during the depths of the 2009 recession.
Prices recovered a bit in the spring, but have fallen again in recent weeks. Executives
think it will be years before oil returns to $90 or $100 a barrel, pretty much the norm
over the last decade.

1. Why has the price of oil been dropping so

fast? Why now?
This a complicated question, but it boils down to the simple
economics
of
supply
and
demand.
United States domestic production has nearly doubled over the last
six years, pushing out oil imports that need to find another home.
Saudi, Nigerian and Algerian oil that once was sold in the United
States is suddenly competing for Asian markets, and the producers
are forced to drop prices. Canadian and Iraqi oil production and
exports are rising year after year. Even the Russians, with all their
economic
problems,
manage
to
keep
pumping.
On the demand side, the economies of Europe and developing
countries are weakening and vehicles are becoming more energyefficient. So demand for fuel is lagging a bit. China's recent
devaluation of its currency suggests the economy of the world's
biggest oil importer may be worse off than expected.

2. Who benefits from the price drop?

Any motorist can tell you that gasoline prices have dropped more
than a dollar a gallon. Diesel, heating oil and natural gas prices have
also fallen sharply. Households are likely to spend $750 less on gas
this year because of the oil prices, the United States Energy
Information Administration said in January. Europeans and
consumers around the world will enjoy similar benefits.
The latest drop in energy prices regular gas nationally now
averages around $2.65 a gallon, compared with $3.45 a year ago is
also disproportionately helping lower-income groups, because fuel
costs eat up a larger share of their more limited earnings.
Gasoline prices are inching up as refineries do maintenance to switch
to more expensive spring and summer gasoline blends.

3.

THE VIDEO CONNECTION WAS LOST. PLEASE REFRESH TO RESUME PLAYBACK.

As the price of crude oil fluctuates, why some countries are faring
much better than others.CreditVideo by Quynhanh Do on Publish
DateJanuary 27, 2015

Who loses?
For starters, oil-producing countries and states. Venezuela, Iran,
Nigeria, Ecuador, Brazil and Russia are just a few petrostates that
will suffer economic and perhaps even political turbulence. Persian
Gulf states are likely to invest less money around the world, and they
may
cut
aid
to
countries
like
Egypt.
In the United States, Alaska, North Dakota, Texas, Oklahoma and
Louisiana will face economic challenges.
Chevron and Royal Dutch Shell recently announced cuts to their
payrolls to save cash, and they are in far better shape than many

smaller independent oil and gas producers that are slashing

dividends and selling assets as they report net losses.
Some smaller oil companies that are heavily in debt may go out of
business, pressuring some banks that lend to them.

4. What happened to OPEC?

A central factor in the sharp price drops, analysts say, is the
continuing unwillingness of OPEC, a cartel of oil producers, to
intervene to stabilize markets that are widely viewed as oversupplied.
Prices of OPECs benchmark crude oil have fallen about 50 percent
since the organization declined to cut production at a 2014 meeting
in
Vienna.
Iran, Venezuela and Algeria have been pressing the cartel to cut
production to firm up prices, but Saudi Arabia, the United Arab
Emirates and other gulf allies are refusing to do so. At the same time,
Iraq
is
actually
pumping
more.
Saudi officials have said that if they cut production and prices go up,
they will lose market share and merely benefit their competitors.
They say they are willing to see oil prices go much lower, but some oil
analysts
think
they
are
merely
bluffing.
The death of King Abdullah in January has prompted speculation
that Saudi Arabia could shift direction, and there has been some
softening in the Saudi public position in recent days. But for the
immediate future, most analysts say the Saudi royal family will resist
any sharp changes in policy, especially as it tries to navigate multiple
foreign policy challenges, like the chaos in neighboring Yemen.
If prices remain low for a year or longer, the newly crowned King
Salman may find it difficult to persuade other OPEC members to
keep steady against the financial strains. The International Monetary
Fund estimates that the revenues of Saudi Arabia and its Persian
Gulf allies will slip by $300 billion this year.

5. Is there a conspiracy to bring the price of oil

down?

There are a number of conspiracy theories floating around. Even

some oil executives are quietly noting that the Saudis want to hurt
Russia and Iran, and so does the United States motivation enough
for the two oil-producing nations to force down prices. Dropping oil
prices in the 1980s did help bring down the Soviet Union, after all.
But there is no evidence to support the conspiracy theories, and
Saudi Arabia and the United States rarely coordinate smoothly. And
the Obama administration is hardly in a position to coordinate the
drilling of hundreds of oil companies seeking profits and answering
to their shareholders.

6. When are oil prices likely to recover?

Not anytime soon. Oil production is still increasing in the United
States
and
some
other
countries.
Demand for fuels is recovering in some countries but production is
likely to only begin declining in the coming months. Then crude
prices should also begin to recover in a lasting way. The history of oil
is of booms and busts followed by more of the same.