The Economics Behind Falling Oil Prices

By Anum Yoon

It’s no secret that oil prices have been collapsing for quite some time now. A barrel of crude oil recently sold for less than $30 — the first time that’s happened since 2003. To put that number in perspective, a barrel of oil sold for $107 in July 2014.

Since then, the price has fallen steadily. To date in 2016, oil already lost more than 20 percent of its value, and more than 250,000 workers in the oil industry lost their jobs due to the erosion of the commodity’s value.

But folks from all over the world depend on oil. While we might wish we could use sustainable energy in all aspects of our lives, that’s simply not the case for the vast majority of us. If oil is still in high demand, why are its prices tumbling so drastically?

Quite simply, it’s a marriage between at least four realities.

1. The United States falls in love with fracking

On one hand, the answer is an easy one: Due to breakthroughs in technology, it’s easier than ever to produce oil in the United States — which is the world’s leading consumer of oil.

This, of course, can be attributed to the rise of fracking, the process by which companies use high-pressured water streams to release gases from rocks buried far beneath the surface of the Earth. Despite President Barack Obama’s pledges to reduce America’s drilling capacities during his presidency and wean the country from oil, his two terms were the source of an explosion in the U.S. oil market. In fact, the country is drilling more today than it ever has before.

Thanks to this expansion, Americans are paying considerably less at the pumps. They’re also paying a lot less for heating oil and diesel, too.

Since the U.S. is now producing so much oil, the country and its citizens don’t have to rely so much on oil from the Middle East and other OPEC nations. Because of this, OPEC — which has traditionally sold its wares at inflated prices in the U.S. market — now has to find new buyers for its products, but those folks don’t have a ton of money.

In other words, the supply of oil continues to swell. And the price comes down because there’s so much oil to be sold.

2. OPEC wants to make fracking as profitless as possible

The Organization of Petroleum Exporting Countries isn’t in any danger of becoming irrelevant anytime soon.

OPEC — which includes Saudi Arabia, Nigeria, Libya, Venezuela, Iran, Iraq and six other countries — has long played an active role in controlling the prices of oil.

Unlike more modernized economies that are diverse, the members of OPEC, generally speaking, derive their riches and wealth from oil. As a result, it is imperative that the members of OPEC take steps to ensure their stranglehold on the oil market continues.

In an effort to put frackers out of business, OPEC has decided to maintain record-high levels of oil production. This is happening as the United States produces more oil than it ever has before.

While it might seem a bit counterintuitive, the OPEC logic works something like this: Produce as much oil as possible, drive the cost of oil down as low as possible, and keep your fingers crossed that the American frackers will eventually be forced to close shop as they’re unable to return a profit on the oil they extract.

Once the frackers are out of business, OPEC retains its dominance on the market and is able to charge what it sees fit for a barrel of oil. If OPEC’s plan is successful, you better believe gas prices won’t stay as low as they are today.

3. Cars are becoming increasingly fuel-efficient

In addition to the increase in U.S. oil production and OPEC’s determination to keep producing a ton of oil, newer cars are coming to market that are quite fuel-efficient. This is partially due to innovation and partially due to government mandate.

In any case, drivers can get from Point A to Point B on considerably less gasoline. The average new car can cover more concrete with less of it, and consumers don’t have to fill up their tanks as frequently.

4. Green technologies are coming into their own

We’re finally seeing automakers like Tesla Motors power the green revolution, giving birth to what many hope is a transformative wholly-electric car that’s as reliable as a gas-guzzler.

While fully-electric cars have yet to take off in American and other markets, they are becoming increasingly popular. As the technology continues to evolve and infrastructure falls into place, we can expect these more affordable cars to become increasingly common.

If everyone’s driving an electric car, what does that mean for OPEC?

Here’s a hint: There’s a reason Saudi Arabia is investing so much money in solar energy.

Be sure to enjoy today’s low prices at the pump. You never know when the price of oil will once again escalate.

Image via Life of Pix/Tanker

Anum Yoon is a writer who is passionate about personal finance and sustainability. As a regular contributor to the Presidio Graduate School’s blog, she often looks for ways she can incorporate money management with environmental awareness. You can read her updates on Current on Currency.