Image courtesy of hoosieragtoday.com

Why Are Oil Prices Dropping? The Speculations Behind The Barrel

Over the last few weeks, there have been many headlines regarding lower oil prices which, to much delight, have naturally welcomed lower gas prices and a few extra dollars in your wallet!

There are various explanations for the sudden cost decrease, some point the finger at the political turmoil between the USA and Russia and others simply refer to the economics of supply and demand. Yet some reports state it is a combination of both. On the plus side, lower prices are great news for consumers and car manufacturers. However , countries dependent on oil sales such as Russia and Venezuela are drastically feeling the pinch.

To make this topic easier to digest, I have compiled a list of causes and speculations for lower oil prices reported to date.

  •  Supply vs. Demand – Economics 101

Oil prices from 1987 - courtesy of forbes.com
Oil prices from 1987 – courtesy of forbes.com

The reason for lower oil prices all goes back to your first economics class: supply and demand. Looking at the chart above, oil prices have spiked around 2010 due to high demand, companies couldn’t keep up with supply which caused the price increase to as high as $115 per barrel. The oil industry is extremely time consuming and costly. It takes time to research, dig, extract and produce oil, therefore in periods of high demand, the demand usually is stretched out until the oil is actually extracted. These periods come and go in cycles, therefore it is natural for the demand to eventually cool down. After some time demand began to ease off, as supply increased, causing the opposite effect in prices. Prices as of January 5, 2015 decreased to as low as $52 per barrel.

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  • Political Tension With Russia

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Image courtesy of nbcnews.com

With Putin’s bold move to take over Crimea resulting in a spillover of sanctions against Russia, there is much speculation the U.S. is pulling the strings on oil prices to teach Russia a lesson. As far fetched as it sounds, Russia is heavily dependent on oil sales and has definitely suffered from the decreased oil prices. The Russian ruble is currently at an all time low, combined with Russia’s personal ban on imports, has further diminished the Russian quality of life. It’s unlikely the U.S. has such vast power over oil prices and production, however this theory is definitely floating around.

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  • Saudi Arabia Not Pulling The Plug On Production

OPEC (Organization of the Petroleum Exporting Countries) is a collection of oil producing nations that extract about 40% of the world’s oil.  On Nov 27th, 2014 OPEC held a prominent meeting to discuss the best response to the winding prices. Saudi Arabia being the second largest oil producer, has a good grip on price influence and is considered as the”cartel” of the oil industry. Many expected Saudi Arabia to pull back on production in order to prop up the prices, however,  Saudi Arabia was in favour of letting the prices continue to drop. This wasn’t much of a surprise, since back

Image courtesy of energytribune.com
Image courtesy of energytribune.com

in 1980s a similar price drop occurred and when Saudi Arabia pulled back on production prices still continued to drop, causing Saudi Arabia to simply lose market share. To avoid making the same mistake twice, Saudi Arabia decided to stay put and allow nature take its course in the 2015 oil price decline.

 

Regardless of the reasoning, the oil price decline will definitely negatively affect countries dependent on oil sales such as Russia, Iran and United States. Some speculate the price decline is simply a part of a natural cycle and expect the prices to increase within a period of time. Others have called this a “crash of the oil industry”, saying the oil prices have simply returned to their norm, without expectation of an increase in the near future.

How have the lower oil prices affected you? Share below!

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Article by: Anna Suzdenkova

Employed in the financial sector for over 7 years. Held various roles including financial advisor, auto claims adjuster and manager of customer service. Attained an accounting degree with Honours. Mutual fund licensed. Passionate about helping people. Forever an optimist, positivity is the key to a happy life. Enjoys helping people decipher the banking world and use it to their advantage!