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Reducing Oil Price in the United State, Research Paper Example

Pages: 5

Words: 1305

Research Paper

The oil industry has been experiencing a revolution in prices since 2008; gas prices have been falling to the current $2 per gallon. The drop in prices allows customers to save up to 77 cents per gallon of gas.  This translates to a $452 savings for every American according to a statistical analysis recently conducted. Owing to a number of market forces, oil prices have been pushed even much further. However, the recent drop in oil prices has implications on the economy, both in the short-run as well as in the long-run.

Reasons for the Drop in Gas Prices

Shale Gas in the United States

Energy is undoubtedly one of the biggest problems that developing and developed nations would like to solve. The overdependence on natural gas saw the near depletion of these deposits. However, the discovery of Shale Gas revolutionized the energy industry in United States. The discovery of Shale gas had major economic implications for the country, both internally and externally. The increase in production of unconventional gas (tight oil and shale gas) led to the general increase in the supply of locally produced and processed natural gas. This increase in supply of natural gas led to the general decrease in the gas prices. Local production provided for a cheaper commodity that can be transported in a cost effective manner that has minimal risks.

Strengths

Balance of Trade

The discovery of Shale gas in the United States came at a point where global prices for oil and natural gas was at an all-time high. The price of natural gas increases relative to the increase in price for oil as most of the natural gas produced come from oil reserves. As such, oil mining and processing plant also deal with natural gas. The increase in production of Shale gas led to the increase in production of natural gas. In 2005, production of natural gas stood at 18 trillion feet per year. By 20013, natural gas production had rocketed to 24 trillion cubic feet per, a 33% increase. This was a result of shale gas production that had increased from 0.5 trillion feet per year in 2005 to 8.7 trillion cubic feet per year in 2013.

As a result, this increase in production of shale gas reduced the amount of net oil imports by the US from 11 million barrels of oil per day to 8 million between 2007 and 2013. These savings translate to $100 million for the US government. This has largely come due to the country being able to sustain a certain percentage of the oil deficit. This serves to reduce the negative balance of trade that the nation is currently experiencing as energy formulates a huge portion of United States’ trade.

Furthermore, the lower prices of oil and gas in the United States allows for the economy to maintain a positively growing balance of trade. Lower domestic oil prices reduces the need for importation of oil. This allows the economy to considerably reduce its expenditure in oil imports and endeavor to realize an overall positive balance of trade.

Production Costs

As stated initially, the United States has had a negative balance of trade for a considerably long period of time. This is largely because oil produced in the East was much cheaper to purchase, refine and distribute. However, this translated to increased costs due to the transportation needed. However, the discovery of shale gas has caused numerous American oil companies to retract to the US as they seek to capitalize on readily available shale gas, reducing the cost of transportation.

The effect of the gradual reduction in oil prices has had a ripple effect on most industries throughout the economy. Most of the products consumed by the American market have their price pegged on the price of oil and gas. This is because either their production process entails the use of oil and gas and/or its transportation entails the consumption of oil and gas.

Opportunities

Government Revenue

The production of Shale gas has translated to introduction of new revenue streams for the US government. The mining, processing and distribution of shale gas is taxed by the US government, ensuring that a considerable portion of the revenues realized is distributed to the National and State government. This is important in ensuring that devolution and equitable distribution is realized as envisioned in the constitution. The reduction in the prices of oil considerably increases government revenue through reducing government expenditure. Lower oil prices allows for the government to reduce costs across the board and create revenue streams through cutting back on costs associated with the importation of oil.

Employment

The successful production of shale gas within the United States has led to the creation of numerous employment opportunities for individuals within the production line and process. The process of mining, transportation, processing and distribution has created numerous employment opportunities for professionals within the field. It is estimated that the shale production industry has created up to 2 million jobs within the United States since 2008.

Furthermore, the lower oil prices translates to a considerable reduction in production costs. As a result, most businesses and companies would find it cheaper to conduct day-today operations. This allows for businesses and companies to employ more expertise in the execution of business functions. By creating an ample environment for businesses to operate, i.e. low production costs, the government allows for the creation of employment opportunities.

Adjust or Not to Adjust

The prolonged decrease in oil prices has a considerably positive effect on the consumer. However, it is important to consider what the long-term implications of the prolonged reduction in oil prices. According to research conducted by HIS Global Insight, the continued reduction of oil prices would considerably improve the economy’s GDP and increase consumer spending. However, these lower prices will lower inflation considerably. This would continue to be a positive gain for the American consumer.

However, should prices continue to drop and maintain lower levels, consumer behavior starts to change. Before 2008, when oil prices were high, most individuals aimed at purchasing the most fuel efficient car. Prolonged low prices of oil may reverse this consumer behavior that has been developed for decades. People would be more likely to buy less efficient cars and drive longer. Consumer behavior adjusts to the prevailing price levels in the long-run.

This may also potentially cause a draw back in some of the most recent advancements in mass transit. Such projects have been developed on the basis of the high cost of transportation. This high cost has predominantly determined by the availability of affordable oil and gas. With the declining and low prices, some of these projects are facing the imminent threat of being abandoned.

In conclusion, the mining, processing and distribution of shale gas has had considerable economic impact on the United States. Shale gas production has led to the creation of a cheaper natural gas alternative. This reduction in gas prices has led to the general reduction of prices of commodities whose production entails the use of natural gas. Shale gas production has also led to the improvement of the United States’ balance of trade by saving up to $100 million in terms of oil and gas imports. Furthermore, the production of shale gas has led to the creation of numerous employment opportunities for a growing labor force. Shale gas undoubtedly has had a tremendous impact on the economy of the United States. The general reduction in oil prices has been caused by the current oil glut resulting from increased shale gas mining in the United States. This is also compounded by the fact that two of the most populated economies, China and India, have reduced their demand for oil and gas. The reducing prices considerably benefit consumers and the government in the short-run. However, in the long-run, consumer behavior is likely to change. Oil prices should continue to reduce even further as the economy stand to gain more in the long-run.

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