How Low Can We Go?

Unless you’ve been hiding under a rock for the past few months, you know that oil prices have been dropping substantially, reaching their lowest levels in six years at $47.71 per barrel. This decrease in price per barrel is due to a few factors that can be explained by simple supply and demand economics.

The first major reason is the increased oil production by the United States, which has doubled over the past six years.  New methods of fracking and newly discovered oil wells have helped increase production. The increase of US oil production has increased the number suppliers of oil, and thus has driven down prices due to increased competition. It also pushes foreign oil out of US markets, making them for other markets in which to sell their oil. Another reason for the decrease in prices is OPEC’s refusal to stabilize prices. In the past, OPEC has decreased production to increase the price of crude oil, but it does not look like this action is in the near future, with Saudi Arabia arguing that cutting production would decrease their market share and only benefit their competitors.  One other factor is the use of more energy-efficient vehicles and other devices that have decreased the demand for oil.

api.asp

The recent nuclear talks in Iran also hold the potential to cause another drop in prices. Iran and six other nations are in Switzerland meeting about Iran’s nuclear weapon situation, urging the Middle Eastern nation to stop proliferation of the weapons. If they abide by the US’s and the 5 other nation’s wishes, sanctions on Iran will be removed and it will be easier for them to sell oil on the open market. By some estimates, Iran could increase oil production by 1 million barrels per day, driving down the price by another $5 per barrel. Although this deal would be ideal to bring peace in the Middle East, it is definitely not good for oil prices. Talks were set to be concluded on Tuesday night, but have continued past the deadline so we will have to wait to see how this meetings turn out.

So is there any hope for oil prices to return to their former high? In the near future, it does not look likely. With the world’s overproduction oil by an astounding 1.5 million barrels per day, even by some conservative estimates it could take years to return to the days where oil was $90-100 per barrel.

-Kylie Coffman

http://www.nytimes.com/2015/01/13/business/energy-environment/oil-prices.html?_r=0

http://www.thefiscaltimes.com/2015/03/31/How-Iranian-Nuclear-Talks-Will-Affect-Oil-Prices

Advertisements

3 thoughts on “How Low Can We Go?

  1. piotrbroda17

    I wonder how the price of alternate, renewable energy sources affected the decrease in oil price. In addition, it would be interesting to see how the prices of those other energy sources reacted to the drastic drop in oil price.

    Reply
  2. rainde16

    I would have to agree that the price of oil (crude) seems to have settled at a rather low stabilized point given the political tension and possible war torn areas of Yemen who have just fallen victim of bombings. Despite holding a low stake in OPEC/world’s production of oil, instability in terms of supply will lead to a bearish investor sentiment which I believe will remain for the near future. At the same time, oil prices have been affected by domestic factors for instance the fact that oil storage, domestically in the United States, has been lowering the price even further.

    Reply
  3. Victor Matheson

    In my opinion, with low oil prices, this would be an ideal time to significantly raise gas prices without having as great a shock on drivers’ wallets. To respond to Piotr, low recently natural gas prices have had large impacts on wind installations. Combined with an expiration of tax credits, the total new installation of wind capacity in 2013 was the lowest in a decade.

    Reply

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s