The past couple of years have shown a rapid and continuing decline in global crude oil prices, and no one seems to know what to expect in the coming months. To illustrate this phenomenon more clearly, Brent crude – the global benchmark for oil – was selling at more than $114 per barrel in June 2014 . Several months later in early 2015, the price had dropped to $60. At the moment, a barrel of Brent crude costs a mere $30, a level not seen in 12 years. Needless to say, it is a staggering downturn.
— Yahoo News (@YahooNews) January 12, 2016
The drastic rise and fall of oil prices can be traced down to simple economics: Supply remains higher than demand, which has resulted in the price crash. A report from the International Energy Agency shows that the world’s energy companies have been producing far more oil than the world needs since mid-2014.
— Amy Harder (@AmyAHarder) January 6, 2016
A brief look back at the years between 2010 and 2014 will show us that this wasn’t always the case. As various nations tried to recover from the financial crisis, the demand for oil soared but global production had some difficulty keeping up. When energy analysts predicted that oil prices would gradually increase from $100 per barrel to much higher levels, some of the biggest energy producers decided to invest billions of dollars in what were called “unconventional reserves,” which included shale formations, Canadian tar sands, and Arctic oil.
Unfortunately, the global economy is experiencing stagnation and political turmoil, two factors that can create a profound effect on oil prices. With China’s economic slowdown, Europe’s Eurozone debt crisis, the conflict between Saudi Arabia and Iran, and notably, Saudi Arabia’s move to increase oil production despite the drop in demand, crude oil prices took a nosedive.
— Business Insider (@businessinsider) January 6, 2016
Saudi Arabia and its allies in OPEC plan to obliterate US frackers completely backfired as they turned out to be far more resilient to the price slide than Saudis initially thought. Add to that the recent enforcement of tougher fuel-efficiency standards by the US – which happens to be the world’s leading oil consumer.
OPEC expects to run US shale out of the market by the end of the year http://t.co/FaLpxo7Ptg
— Quartz (@qz) March 17, 2015
So how does this oil price slump affect the rest of the world? The hidden and obvious implications are great – for one, it’s not just the giant oil firms that will feel the blow of this catastrophe, but also the ancillary businesses that depend on these companies for existence and survival. Many oil factories are currently idle and millions of workers have been laid off. Vehicle owners in developed nations such as Japan, Germany, and the US are spending more on other things since petroleum is now cheaper. Oil producing nations such as Saudi Arabia are hurting quite badly in the revenue department.
As is always the case, a slight change in any of these factors can determine whether oil prices will go back up, remain the same, or sink even lower. In the meantime, we can expect these low prices to continue indefinitely.