The news in the markets is dramatic: Crude oil prices dropped below $70 (Dh257) per barrel. This continues a dramatic price decline for a commodity that in late June cost more than $100 per barrel.
The shift has markedly lowered US gas prices (which are now well below $3 per gallon) and thus, may be beefing up the US economy heading into the Christmas spending season, by putting considerably more money in consumers’ wallets. But what’s driving this trend — which is quickly becoming the single most important economic story of 2014?
1. Opec: First and most immediately, there’s the fact that the Organisation of Petroleum Exporting Countries decided not to cut oil production at their meeting Thursday. This was Opec’s “most important [meeting] in years,” the Post’s Steven Mufson reported on Tuesday, because it came amid a pre-existing downtrend in prices, and everybody wanted to know if Opec would take any action to halt the decline.
It didn’t — and crude oil prices immediately tanked.
But where did the broader and longer term downtrend come from? Three more answers:
2. Booming US and world oil production: Even as Opec kept production steady, it has been growing elsewhere. The United States, most of all, has seen a major growth in oil production, thanks to the shale oil revolution. The figures from the Energy Information Administration are truly dramatic: Almost twice as many barrels a day of crude oil are being produced now in the US, versus in 2005.
Production of oil has also been up in many other countries. Canada increased its total production from just more than 3,300 barrels per day in 2009 to over 4,000 in 2013 and Russia increased from 9,900 barrels per day in 2009 to 10,500 barrels per day over the same time period. Libya, meanwhile, is bouncing back after production tanked in 2011 due to the country’s civil war.
In sum, there’s just more oil out there for people to buy, which is having a predictable effect on prices, pushing them downward.
3. Slack demand in many regions including Japan and Europe: There’s also the fact that while the U.S. has recovered steadily from the Great Recession, many other countries have not. They’re struggling, and that is dampening oil demand.
In Europe, for instance, while total petroleum consumption averaged well over 14,000 barrels per day in 2010 and 2011, it was less than 13,000 in the first quarter of this year, and not much higher in the second quarter. There’s a similar story to be told about Japan, where demand is also dropping, according to the Energy Information Administration.
4. Strides in vehicle fuel efficiency: In the US, we’re also using less fuel in our cars because those cars are more efficient. The average fuel efficiency of a newly purchased light-duty passenger vehicle in this country was 36 miles (58 kilometres) per gallon in 2013. Back in 1980, it was 24.3 miles (39 kilometres) per gallon.
So in sum, the trend in oil prices is fundamentally due to that most basic of economic factors: Supply and demand.
So what happens next? Does the trend continue, or is it possible we’ve already overshot and are due for a reversal in oil prices? Observers can’t be sure but there are some reasons to think a bounceback could be possible. And in the long term, overall fuel consumption is definitely projected to increase, not decline, out towards 2040 — driven largely by developing nations.
