Over the last four years, oil prices had remained constant. However, in the last seven months prices per barrel have dropped considerably. In 2010, a barrel of crude sold at approximately $110 dollars per barrel, whereas in 2014 the price per barrel dropped to below $50 a barrel. This drop can be attributed to several different reasons. The US is increasing production of crude oil, and the slowing economic growth in several countries which has reduced demand, especially China. Currently, US oil production is at the highest levels it has been at in 30 years. In addition, the recently lifted sanctions on Iran have been lifted and it will begin producing oil as well adding to an already flooded supply. These reasons coupled with the fact that Saudi Arabia’s Oil Minister, Ali al-Naimi, has declared that The Organization of the Petroleum Exporting Countries (OPEC) will not be reducing production regardless of how low the price per barrel may fall, has also had an affect. These falling prices will have a major impact on business and the economy in a number of ways.
The continued lower cost of oil is likely to produce a decline in prices in a number of areas. Shipping costs will decrease due to lower fuel costs allowing for stores to be able stock their shelves at a lower rate than they were previously capable of doing. Lower fuel costs also affects the prices of petrochemical products such as fertilizer and plastics. This is due to raw materials being less expensive. With the continued drop in oil prices eventually every product will see a reduction in price causing core inflation to dip even lower.
Interest rates are likely to rise while oil prices decrease. Lower oil prices at the pump will drastically reduce the amount of capital in the accounts of oil producing nations. This can cause the global savings rate to fall and interest rates to rise.
Although the US is one of the largest oil producers in the world, over half of oil used in the US is imported. The current drop in oil prices will provide at least short term benefits to American consumers along with assistance to countries that must import oil. However, it will have a major impact on oil producing nations such as Qatar, Russia, Saudi Arabia and Venezuela. These top four oil producing nations have different opinions on how best to manage oil production. Previously there was talk of scaling back on oil production, yet recent talks indicate that they are leaning toward putting a freeze on the present oil production. This is a major shift for Saudi Arabia who has continued to increase production even as the price per barrel dropped.
Venezuela’s economy relies heavily on oil prices and has very little other financial revenues. They are hopeful that the other major oil producing nations will be able to reach an agreement on how best to handle the current oil situation. While Saudi Arabia and Russia also rely heavily on the oil industry they are more financially stable than Venezuela. No final decision has been reached at this time but the four major oil suppliers agreed that if the other exporters of oil freeze production then they will do the same. It will not be easy to have all of the oil producing nations agree to freeze oil production. However, it may be the best solution for oil producers.
1. “The Impact of Falling Oil Prices.” The Impact of Lower Oil Prices. JP Morgan, 2016. Web. 16 Feb. 2016.
2. Kramer, Andrew E., and Stanley Reed. “Russia and 3 OPEC Members Agree to Freeze Oil Output.” The New York Times. The New York Times, 16 Feb. 2016. Web. 16 Feb. 2016.