BY: KATHERINE GAN, CONTRIBUTOR
Last Wednesday, on January 20th, 2016, crude oil dropped to below $27 a barrel, a far cry from $100 a barrel. This phenomenon is due to the international glut, or increasing supply, of oil that has persisted and only worsened since 2014. As Shaan has discussed on this site before, last year seemed to have been the lowest oil was going to get. The sharp drop in oil prices has continued, however, reasulting in cheaper gasoline, with the average American expected to save $700 dollars this year alone. However, while consumers benefit from cheaper prices, producers—OPEC members and U.S. energy companies alike—see lower profit margins and suffer.
It is crucial to analyze the cause of the free fall in both domestic and international oil prices. One of the major factors is the shale gas revolution in the United States, caused by fracking and technological advances. It has resulted in the production of oil and natural gas at an unprecedented rate. Due to its domestic surplus of energy resources, the United States has reduced its reliance on foreign countries’ oil. Additionally, other oil-importing countries can now shift away from their traditional oil producers, such as OPEC countries, and seek U.S. shale gas. For nations such as Venezuela, Saudi Arabia, Iraq, Nigeria, and even Russia, who rely on oil for economic growth and revenue, the U.S. shale gas revolution has drastically curbed profits and growth. In fact, the oil-reliant economies of the six Gulf Cooperation Council countries saw an estimated 3% growth in 2015, down from an average 4.5% over the past decade. The implications of the dropping oil price are not limited to weakening economies. The plunge in growth has contributed to political destabilization in Venezuela and susceptibility to terrorism in the Middle East. It has become clear that plummeting prices are crippling foreign countries, both politically and economically.
Counterintuitively, in response to surging United States’ energy production, countries such as Saudi Arabia have drastically increased oil output. The logic behind this catastrophic response is that pumping more oil and tapping into reserves is the only way to undermine rival producers and garner demand. Of course, as more oil floods the international market, the price and profits of oil collapse. This only creates a feedback loop that exacerbates the current problem. As the price of oil continues to fall, countries desperate for profit and economic recovery produce even more than before.
Due to growing supply and shrinking demand for oil, even energy companies in the United States have felt the consequences. In 2015, 42 energy firms in North America filed for bankruptcy and 93,800 people were laid off by U.S. oil and gas companies. Moreover, banks such as Wells Fargo, Citigroup, and JP Morgan Chase have lost billions from the loans to energy companies. Ironically, while the movement toward shale gas was intended to make the U.S. independent from the volatility of the global oil market, it seems the country has suffered nonetheless.
The stark consequences of the oil glut, to countries and companies, both abroad and at home, has become clear. This begs the question: what’s next? Some experts predict that non-OPEC countries will sharply reduce supply in 2016, spurring a rebound in prices by the end of the year. Other analysts, more pessimistic, claim that oil executives will demand no reduction in oil output because their jobs and salaries depend on it. Even the International Energy Association foresees the world drowning in oil as new Iranian output cancels production cuts elsewhere. Regardless of whether oil prices will fall or rise, they’re down for now, and so is the price of gasoline. We might as well get used to it.
Where will oil prices trend this year? Leave your ideas below!