Mitchell Grinwald
Mrs. Straub
AP Econ
9/19/15
Falling Oil Prices, Why and What to Expect
No one likes paying for gas. Some people get around it by carpooling, some with public transit, some with electric or hybrid cars. This past summer however, all of us were able to pay a significant amount less for gas without changing our individual consumption habits. This was due to changing production patterns in the US and around the world which caused, and will continue to cause depressed oil prices in the near future.
The recent decline in gas and oil product prices (click here for a site with graphs showing Oil prices over different periods of the last 5 years) are the result of a large buildup of infrastructure in the US recently which has greatly expanded the oil and shale oil production capacity of the country. This increased production capacity in the US resulted in a huge change in the number of oil producers worldwide when their operation began, causing a leftward shift in the supply curve for oil.
While this increased production accounted for the initial drop in price, the severity and duration of the price depression was exacerbated by three factors, the financial situation of the new producers, a change in expectations for producers, and geopolitical events which interfered with the typical regulation of production.
Many of the additional producers who have entered oil production in the US in the past few years are carrying large amounts of debt. To maintain payments on their debt and keep their business afloat, these producers need to produce and sell as much as they can, so their production has not been largely affected by the falling price of oil. Additionally these producers, as well as all other oil producers, experienced changed expectations while the US oil production was increasing. Because oil producers knew that more producers would be coming online in the future, increasing supply and lowering price, they sold more of their supply initially, driving down prices even more. Due to the fact that US production continuously increased over a long period of time, expectations were continually that oil would be cheaper in the future, driving increased sale and decreased storage by producers during the present. Finally, some of the largest oil producers in the world such as OPEC and Russia believed that it was in their economic and political interest to continue production at full capacity during the US production surge, in hopes of driving prices low enough to drive the US producers out of business. OPEC and Russia enjoy great economic and political influence worldwide due to their positions as two of the principal energy suppliers to developed nations. To protect this influence they were willing to sell huge amounts of oil at extremely low prices, contrary to production patterns we would typically expect from the Law of Supply (watch this video for other reasons that oil production has yet to drop).
Recently, these trends have begun to reverse, prompting a slight rise in the price of oil and its related products. The tendency for oil prices to return to the Equilibrium Price has begun to take hold, as domestic producers have marginally reduced production. Additionally, US and global producers have reduced the supply of oil by storing large amounts of it and producing larger amounts of alternative products.
Some analysts predict that the excess of oil will soon be disposed of and prices will be rising again in the near future, others however, believe that it could be over 15 years before that will happen. Goldman Sachs, for instance, not only predicted that, but also recently projected that oil prices could fall as low as $20 a barrel in October, when many refineries are expected to reach their storage capacities and be forced to close.
While another huge drop in oil price would be surprising, it could be the best way for the oil industry to work through the huge surplus of oil they currently have. If oil prices were to fall to $20 per barrel, it could produce a large change in expectations in consumers, resulting in a large shift in the demand curve. Even if the demand curve were not to shift, quantity demanded would massively rise as a result of the low prices. Such an increase in demand would help oil producers lower their stores to a level where they would be able to start producing and selling their product with greater control, eventually bringing the price back up.
While the educated consumer knows that in the long term oil prices will rise and even surpass previous highs, in the short term it appears consumers will enjoy increased purchasing power at the pump, something we can all look forward to.
Bibliography:
"The Price of Oil Is Down, So Why Is Production Still Going Up?" Bloomberg.com. Bloomberg, 5 Mar. 2015. Web. 19 Sept. 2015.
Tuttle, Robert. "Goldman Sees 15 Years of Weak Crude as $20 U.S Oil Looms." Bloomberg.com. Bloomberg, 17 Sept. 2015. Web. 19 Sept. 2015.
"Crude Oil - Electronic (NYMEX) Oct 2015." CLV5 Future Quote. Marketwatch, n.d. Web. 19 Sept. 2015.
Puko, Timothy. "Oil Prices Surge 5.7%, Boosted by Heavy Draw on Stockpiles." WSJ.com. The Wall Street Journal, 16 Sept. 2015. Web. 19 Sept. 2015.
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I really like your topic, because it can relate to a majority of us as relatively new drivers who now have to pay for transportation. It was interesting to me that gas prices might not be rising for another 15 years, which again for most of us will encompass the remainder of high school, college and any post collegiate schooling, along with a few years to get a stable job. If that prediction turns out to be true, we might not have to worry about gas prices being too high until we have a job that can easily support transportation cost.
ReplyDeleteOverall, great concept and use of sources to provide evidence for the statements you made.
Great post! It's always a good day when the prices are below $3. When you mentioned that many people are starting to move over to electric and hybrid cars, I definitely agree, but do you think people will begin to move back over to cheaper, easier to maintain, regular vehicles? It would be an interesting trend to look into and talk about. Again, great post!
ReplyDeleteThis is a good topic to write about as it clearly affects everyone that owns anything with an engine that runs on gasoline. It would be amazing if gas prices wouldn't increase greatly for another 15-20 years as it was predicted in this post, and it would definitely keep a lot of people happy if it wouldn't jump up higher. It'll be interesting how that affects the growing amount of people switching to hybrid/electric cars since it will be even more affordable to have a regular gasoline-burning engine rather than a highly expensive electric or hybrid engine.
ReplyDeleteThis was a good look into how the change in production can affect the demand and price of oil. It also shows that by having such an important resource at a lower price it can help with other products and their demands. It will also impact a lot of people as we all need transportation and now it is cheaper to maintain increasing the amount of money we have to spend as well as companies transportation costs.
ReplyDeleteThe decreased price of Oil (and the resultant lower gas prices) means that there is lower opportunity cost for consumers when purchasing it, they will be able to spend the money they would have otherwise spent on gas on other products. This is a desirable thing for consumers. Thanks for the comment.
DeleteI really like how you chose a topic that closely relates to many individuals. It caught my attention because gas prices are something that I have to consider every month while filling my tank, as many of us do. I found your information very interesting, and the fact that we took more than 1/3 of our oil rigs and the oil production is up is amazing. It's also nice to know that the oil supply in the U.S. is going to be constant for an estimated 80 years and that prices will stay the same for about 15-20 year. Last year the prices of gas were almost at $4 dollars a gallon, so that's helpful information for people like me who pay for their own gas to know that it will be staying at or around where it's at now.
ReplyDeleteThe price of oil is a big factor in all of our lives because we are driving so many places. While is is good to know that the price of oil may not rise for 15 years, you also said it could rise. If the rise would occur it would definitely change the consumers purchasing power at the pump. Especially for teenagers it is good to know the trends because if not already, we will have for our own gas to get us around.
ReplyDeleteThe Oil industry is a huge industry and I impacts the lives of almost everyone on this earth. I, as well as everyone else in America and other developed countries are enjoying this low price, unfortunately it will come back to haunt us. Oil is a Limited and Non renewable recourse. It is in plentiful amounts currently, but at the current rate of consumption we will be scraping the bottom of the bowl trying to salvage whats left before our generation even reaches the age to accompany nursing homes. I feel they need to raise the prices on all oil products, therefor in return allowing the supply to last longer. This will occur because people will use oil more wisely and there won't be as much being consumed.
ReplyDeleteThe prices of gas effects everyone who drives a car, especially when the prices increase. When the prices increase I have to take more money out of my paycheck to fill my tank and when it went down I could use my money for other things because it took less money to fill my tank. If the gas prices increased again but more drastically like it has in the past, it would have a even greater effect on people and more people would like you said try to get around by other means than driving.
ReplyDeleteYour choice of topic was excellent as it is pertinent to all of us, even those of us who are not currently driving will be in the near future. The price of oil is something I think about all the time as it is a big factor in budgeting my money. Something that I feel would have been interesting to include is events that could possibly cause an increase in prices such as the recent manufacturing error or natural disasters and what effect they could have on these predictions.
ReplyDeleteI like your topic choice because most of us can relate to this as it is a very important issue that not many people actually think/budget about. It is interesting to see how differently people would act if people budgeted more around the price of oil and gas. It would be cool if you would have included statistics about how different people make decisions based upon the stock markets predictions about the future of oil and how people's behavior change because of it.
ReplyDeleteThanks for your post, I think this is the perfect time to learn about the dynamics that affect the international price of oil. Though oil prices are quite low, low oil prices are ultimately great for consumers and corporations alike. After all, people who can afford to purchase plenty of gasoline are more prone to arrange their lives around fun road trips.
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