Last Wednesday, on January 20th, 2016, crude oil dropped to below $27 a barrel, a far cry from $100 a barrel. This phenomenon is due to the international glut, or increasing supply, of oil that has persisted and only worsened since 2014. As Shaan has discussed on this site before, last year seemed to have been the lowest oil was going to get. The sharp drop in oil prices has continued, however, reasulting in cheaper gasoline, with the average American expected to save $700 dollars this year alone. However, while consumers benefit from cheaper prices, producers—OPEC members and U.S. energy companies alike—see lower profit margins and suffer.

It is crucial to analyze the cause of the free fall in both domestic and international oil prices. One of the major factors is the shale gas revolution in the United States, caused by fracking and technological advances. It has resulted in the production of oil and natural gas at an unprecedented rate. Due to its domestic surplus of energy resources, the United States has reduced its reliance on foreign countries’ oil. Additionally, other oil-importing countries can now shift away from their traditional oil producers, such as OPEC countries, and seek U.S. shale gas. For nations such as Venezuela, Saudi Arabia, Iraq, Nigeria, and even Russia, who rely on oil for economic growth and revenue, the U.S. shale gas revolution has drastically curbed profits and growth. In fact, the oil-reliant economies of the six Gulf Cooperation Council countries saw an estimated 3% growth in 2015, down from an average 4.5% over the past decade. The implications of the dropping oil price are not limited to weakening economies. The plunge in growth has contributed to political destabilization in Venezuela and susceptibility to terrorism in the Middle East. It has become clear that plummeting prices are crippling foreign countries, both politically and economically.

Counterintuitively, in response to surging United States’ energy production, countries such as Saudi Arabia have drastically increased oil output. The logic behind this catastrophic response is that pumping more oil and tapping into reserves is the only way to undermine rival producers and garner demand. Of course, as more oil floods the international market, the price and profits of oil collapse. This only creates a feedback loop that exacerbates the current problem. As the price of oil continues to fall, countries desperate for profit and economic recovery produce even more than before.

Due to growing supply and shrinking demand for oil, even energy companies in the United States have felt the consequences. In 2015, 42 energy firms in North America filed for bankruptcy and 93,800 people were laid off by U.S. oil and gas companies. Moreover, banks such as Wells Fargo, Citigroup, and JP Morgan Chase have lost billions from the loans to energy companies. Ironically, while the movement toward shale gas was intended to make the U.S. independent from the volatility of the global oil market, it seems the country has suffered nonetheless.

The stark consequences of the oil glut, to countries and companies, both abroad and at home, has become clear. This begs the question: what’s next? Some experts predict that non-OPEC countries will sharply reduce supply in 2016, spurring a rebound in prices by the end of the year. Other analysts, more pessimistic, claim that oil executives will demand no reduction in oil output because their jobs and salaries depend on it. Even the International Energy Association foresees the world drowning in oil  as new Iranian output cancels production cuts elsewhere. Regardless of whether oil prices will fall or rise, they’re down for now, and so is the price of gasoline. We might as well get used to it.

Where will oil prices trend this year? Leave your ideas below!

  • Adithya prasad

    Hi katherine,
    Isnt the production of oil via shale gas in the US using fracking very expensive compared to producing it in oil rich countries of Saudi arabia, Nigeria, Russia etc? When the costs of producing oil is much higher than the selling price, companies would suffer losses. Hence, I foresee that the US companies would stop producing such expensive shale gas and in turn this would reduce the supply. So, the chances of price stabilization is possible in the future. Countries like Saudi Arabia, Russia etc wont cut down their production as it would seriously harm their market share. For them the cost of producing is not as expensive as the US. So, US who started the shale gas revolution would be forced to end it too. what do you think?

    • Katherine Gan

      Hi Adithya! In terms of costs, perhaps it is more expensive for the U.S. to produce shale gas than countries with an abundance of oil. However, if U.S. companies do continue to cease production, then American jobs and towns will be devastated. On the other hand, I think that politically, it is far more beneficial for the United States to rely on its own supply of shale gas than turn to the volatility of OPEC countries. Reducing dependency on oil-rich countries like Russia, Saudi Arabia, and Nigeria allows the U.S. to move towards energy independence and hold a valuable bargaining chip in turns of negotiations and diplomacy. In the short term, oil prices seem to be on the fall, but perhaps in the long term, they will stabilize, as you claim. Of course, it is impossible to say for sure, especially with the lifting of Iran’s oil sanctions. Thanks for commenting and I appreciate your insight into the topic.

      • Adithya prasad

        Hi Katherine, Thanks a lot for your reply.
        Yes, I agree with you that if US stops producing shale gas then a lot of jobs would be lost and market imbalance occurs. Interesting to note the political benefit in terms of negotiations and diplomacy. But do you think all that is required considering the following?
        1. There is already an over supply of oil in the world markets. Why does US have to use costly measures (more investments) and supply more oil? The US economy is atleast not dependent on oil. Weapons and technology are a very vital thing for US. As you have mentioned before, nations such as Venezuela, Saudi Arabia, Iraq, Nigeria, and even Russia, who rely on oil for economic growth and revenue would be crippled because of this oversupply. I guess US should not do it for its own selfish reasons to reduce the dependency on others. At the same time, these oil reliant countries need to think of alternatives to survive themselves in the future.
        2. “Fracking” – the process through which shale gas is manufactures is a completely non-environment friendly process. It uses a lot of water and pollutes the environment a lot. Shouldn’t US consider moving more towards renewables and more environment friendly sources of energy if it really wants to not rely on the volatility of OPEC countries.
        I guess on the whole all countries think for themselves and how to be self reliant and so on. Very few actually think about the whole world as one and the other country economies that will suffer because of one’s mistake.

        • Katherine Gan

          Hi Adithya! Thanks for replying. I am not necessarily saying that the United States should continue to invest in shale gas at its current rate given the ongoing oil glut. However, I am arguing that it is likely the United States will continue to do so because of the geopolitical benefits as well as the ability to increase US influence and hegemony. Moreover, in regards to foreign countries, I think from a Western perspective, it is easy to tell foreign countries to diminish their reliance on oil and diversify their assets. However, when countries such as Saudi Arabia need 80% of GDP from oil, their drastic increase in supply seems somewhat justified. Of course, in the long term, countries should not center their economies on finite resources. In regards to the environmental problems with fracking, I completely agree-there are incredible risks to the ecosystem and American citizens. Nevertheless, for the United States to switch completely to renewable energy such as solar and wind is impossible because those resources are underdeveloped and have intermittency issues. That’s why the movement away from fracking should be gradual and improve the efficacy of renewable resources. This way, in the future, we can be a truly clean society. Thank you for commenting.

          • Adithya prasad

            Agreed Katherine. Hope the whole world moves towards more environmentally friendly resources into the future and the other economies try to diversify their resources and not rely on oil completely.
            Thanks for your interesting insights and comments again:)