Falling oil prices lead to rising economic concerns

(J.T. Kim | Concordiensis)

The price of oil worldwide has decreased by approximately 60 percent since June 2014.

The decline marks the largest downturn experienced by the oil industry since the 1990s.

With oil prices dropping, concerns over the economic ramifications are rising internationally.

The driving force behind the drop is the basic economic principle of supply and demand.

The demand for oil as fuel is decreasing due to the move towards “green energy,” which has led to the production of more energy efficient vehicles in both Europe and developing countries.

Overproduction of oil and stagnating demand has causes prices to plummet. Canadian and Iraqi oil production has been on the rise in recent years. Even greater supplies are expected as Iran reasserts itself in the oil industry.

Previously, economic sanctions led to a decrease in Iranian oil production totaling a drop of about one million barrels a day.

Now that some of the economic sanctions that had been imposed on Iran have been lifted, oil production is expected to increase.

The United States alone has doubled its domestic production of oil, lessening the country’s need for imports.

As such, Nigeria, Algeria, Saudi Arabia and others who traditionally sold to the U.S. have to compete with each other for business in Asian countries.

This competition has forced these countries to further reduce their prices.

Iran, Venezuela, Ecuador and Algeria have voiced their demand for Saudi Arabia, the United Arab Emirates and other Gulf States to step in and cut production to generate better oil prices.

These countries wants to stabilize market prices through the diminishing of oversupply. However, the Saudi Arabian countries have refused this proposal.

The oil cartel OPEC, de facto led by Saudi Arabia, has refused to intervene, even voicing its willingness to allow prices to drop even lower.

Saudi Arabia can afford this gamble because it has substantial foreign currency reserves.

Some have speculated conspiracy theories for the dropping prices.

The resulting drastic drop in prices could possibly be motivation for the United States and Saudi Arabia to overproduce oil.

These oil-producing nations may desire to hurt the economies of countries like Russia and Iran, for whom oil is crucial to their economies.

Still, such theories are met with skepticism due to the increasingly strained relationship between the United States and Saudi Arabia.

The drop in oil prices has brought benefits to oil importers and consumers. The decrease in gas prices has resulted in lower expenses for motorists.

The cost of living has fallen with diesel, heating oil and natural gas prices, which is beneficial to lower income groups of people.

Thus, theoretically, a decrease in oil prices encourages spending in other areas, leading to an increase in the GDP. On the other hand, other oil exporting countries have been hit hard.

Many countries that export oil often rely on tax revenue from oil production as funding for government spending. Russia, for instance, generates 70 percent of its tax revenue from oil production.

A fall in oil prices can lead to government budget deficits that make either raising taxes or spending cuts necessary.

Indeed, spending cuts could lead to unrest in countries like Venezuela that rely on revenue from oil production to fund social programs.

Within the United States, Alaska, Texas and Oklahoma are taking hits economically as companies like Chevron, Royal Dutch Shell and BP have been making cuts to their payrolls to save money.

As a result of the downturn, approximately 250,000 oil workers lost their jobs, and manufacturing, drilling and equipment production has also fallen.

In Europe, the concern is for excessive deflation. As of 2014, the European Union had fallen to a five-year low of 0.4 percent.

Even deflation can create a host of economic problems, including lower consumer spending and investment.

Falling oil prices, deflation, and low consumer confidence factored together are more likely to cause consumer to save over spend.

It could prove difficult to rebound from this trend of deflation due to the creation of a period of stagnant economic growth, which would prove detrimental to indebted Eurozone countries trying to reduce their debt to GDP ratios.

The future for oil companies remains uncertain. A rising demand for fuel in some countries may help prices recover.

Still, production capacity is walking a fine line in the cyclical history of the rise and fall of the oil industry.


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