Oil Prices: What’s Behind the Drop? Essay Example

Source:  Krauss, Clifford (2015). Oil Prices: What’s Behind the Drop? Simple Economics. http://www.nytimes.com/interactive/2015/business/energy-environment/oil-prices.html?_r=0 (Retrieved on November 14, 2015).

Current Event Two: The Decline in the Price of Oil

Summary: Since June 2014, the price of oil has been declining.  The price of a barrel of oil has been reduced by half and it is estimated that it will be years before it returns to $90 to $100 per barrel.  The decline is occurring due to a decrease in demand and an increase in supply.  The United States has been relying more on domestic oil and less on oil from the Middle East.  There is less of a demand for oil in Europe due to a weak economy.  As a result, vehicles are becoming more energy-efficient.  Asia is now one of the largest oil importers, China has recently devalued their currency.  Most oil-producing countries have been forced to reduce their prices due to competition. Gasoline prices have decreased more than a dollar a gallon.  The prices of natural gas, heating oil, and diesel have also significantly decreased.

The drop in oil prices has been a blessing for Americans and Europeans.  Motorists are spending less on gas, and households, especially lower-income households, are better able to save money.  However, the drop in price is negatively affecting oil producing countries such as Venezuela, Iran, Nigeria, Ecuador, Brazil, and Russia.  It is likely that these countries will experience both economic and political difficulties.  Countries in the Persian Gulf will have less resources and will be unable to provide assistance to struggling nations.  Economic challenges will befall Alaska, North Dakota, Texas, Oklahoma, and Louisiana.  Oil companies are also being negatively affected by the drop in price.  Small oil companies are going out of business and larger oil companies are laying off workers.  So far, more than 200,000 oil workers have lost their jobs.

OPEC could help with the situation by reducing production of oil, which would help to stabilize the oversupplied market.  However, they will not intervene, and Iraq is actually producing more oil.  Saudi Arabia will not reduce their oil production because they do not want to lose market share.

Significance:  The price of oil has been decreasing for many reasons.  There is less demand for oil, but there is an excess of supply.  Both the United States and Europe have less demand; the United States due to the conflict in the Middle East, and Europe due to its weak economy.  And since the conflict in the Middle East, the United States is able to produce domestic oil with less cost, because they do not have to pay for the high price of import.  Another factor that decreased the price of oil, is that China had devalued their currency and they are the world’s leading oil importer.  Nonprice-based factors are contributing to lower oil prices because it is now trendy to be eco-friendly and have vehicles that use gas more efficiently, or abandon fuel-operated vehicles all together.