My article is about how the price of crude oil is falling due to the surplus of oil production around the world. The global political conditions are not helping the problem given that we are already over producing oil at a rate of 1 million extra barrels per day. If or when Iran gets its trade sanctions lifted we can be looking at an extra half a million barrels a day being added to the oil market. While the drop in oil prices by around 70 percent in the last 18 months sounds good to everyday consumers, companies and stocks are taking major hits. For example, the S&P 500 is down about 8 percent in the first two weeks of the year and chinese stocks have dropped 20% from their local peak. The article quotes Tom Kloza, the global head of energy analysis for the Oil Price Information Service, saying "Global financial damages trump the benefits of cheap oil at anything under $30 a barrel.”
Given this drop in oil price many smaller oil companies are being forced out of the market or being forced to operate at a loss to pay back loans they owe. Big operation in places such as the Gulf of Mexico also cannot be stopped because the constant pumping of oil is the only way the rigs can be profitable. Usually if this happened in the past, Saudi Arabia and OPEC would have cut production to allow the market price of oil to rise again. However, with the introduction of shale drilling in the United States, Saudi Arabia cannot risk losing their power in the market to the new shale oil companies in the US which have doubled american oil production since 2008. Currently we are looking at the greatest oversupply of oil since the late 1990's where oil prices dropped to less that $10 a barrel adjusted for current prices.
This being said, oil prices historically are known to be variable and change incredibly fast. We can see this in the early 2000's where the price per barrel shot up to about $150 after the demand in emerging markets increased dramatically, both the United States and Mexico were declining in production and political turmoil in developing nations which produced a sizable amount of oil.
There are many different scenarios that can occur that may shift the production of oil. Will reusable energy become accessible enough that oil is no longer demanded? Will conflict erupt in the Middle East and slow oil production in the region? Will developing nations demand more and more oil as they strive to grow to become an economic power? In any case, only time will tell the future of the market for oil.
Link to Article
Once concern I have heard for the oil market is that because of its current low costs, the amount of inflation seen in the US economy has been less than expected partially because the low oil costs have pressured down inflation. Do you think this is true? If this were true, because of the high volatility of oil costs, one could imagine that if oil production slowed and prices started rising again, we could start seeing an increasing rate of inflation. I think that this is another concern that we should take into account for the whole economy as we watch the oil market and how it will effect our economy as a whole.
ReplyDeleteThis is a very interesting article. I've heard that these recent low costs could force companies to begin researching new sources of energy. This aligns perfectly with your article. Your article talks about how the massive oversupply of oil has caused the price of oil to shoot down. Hopefully, companies will try to beat their competition by researching new sources of energy, and we can finally move on from the non-renewable, pollution causing source of oil.
ReplyDeleteThis is a very interesting article. I've heard that these recent low costs could force companies to begin researching new sources of energy. This aligns perfectly with your article. Your article talks about how the massive oversupply of oil has caused the price of oil to shoot down. Hopefully, companies will try to beat their competition by researching new sources of energy, and we can finally move on from the non-renewable, pollution causing source of oil.
ReplyDeleteA large factor in the oversupply of oil is because of the recent oil boom in the United States. Shale drilling has been a very efficient method of collecting oil (Especially in parts of Ohio). I have talked to farm owners with wells on their property and the checks that they receive have become less and less because companies are slowing down the pumps. Prices are so low that they don't want to produce as much to sell at the current price.
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