WHY OIL PRICES KEEP FALLING 1

Why Oil Prices Keep Falling and Throwing the World into Turmoil

Kaushik Mashettiwar

Rutgers
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Why Oil Prices Keep Falling and Throwing the World into Turmoil

Plumers (2015) article in Vox explains the dynamic and confusing oil industry.

He describes how the various events in the world have resulted in a decrease in the

price of oil. Plumer begins with a brief history of the price of oil in the past decade,

highlighting various factors that impacted production and energy use in various

countries. Plumer outlines the situation of the various petroleum producing regions in

the world. These include North America, the Middle East, South America and Russia.

Some nations, such as Saudi Arabia, Russia and Venezuela, are extremely dependent

on oil production. War and civil unrest reduces production, and through to 2011 supply

of oil was low while demand was high. Conflicts in the Middle East such as the war in

Iraq and civil unrest in Libya created downward pressure on supply while demand in

high consumption countries remained steady. The result was high prices, with oil selling

for $100 a barrel.

Plumer explains how it is possible that in a period where oil reserves are in

decline, the producer surplus continues to put downward pressure on prices. While

Venezuela and Russia need high oil prices to ensure their economy functions, Saudi

Arabia and other OPEC nations have determined that they will continue to produce at

the same rate as they do not want to risk losing market share (Plumer, 2015). The same

region that resulted in high prices in the past decade is therefore responsible for the low

prices today. Production levels continue at the same rate, with new sources of

unconventional oil from Canada and the United States (Plumer, 2015). Fuel efficiency

and regulations have resulted in less need for energy. For this reason the supply
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remains higher than demand. This ensures that world prices remain low, despite the

concerns of oil dependent nations.

Oil is a commodity like any other when it comes to the forces of supply and

demand. Excess supply over demand has a downward pressure on price, and

increased demand will cause upward pressure on prices. Both demand and supply are

in flux. China is rapidly growing, which created excess demand for a while. The United

States has a great demand for oil; however measures to increase fuel efficiency have

resulted in a plateau in demand. These demand shifts include increased renewable

energy sources, redesign of automobiles and technology to reduce the amount of

energy required and a focus of much of the world on reducing the carbon footprint of oil.

The result is steady and even decreasing demand for oil throughout the world, even

while the supply increases. While the price of oil is low today due to refusal to decrease

production, given the low price, production will run out sooner rather than later. Oil is a

finite resource. While technology can help to extract oil, as is the case in the tar sands,

supply is decreasing with every barrel that is produced and sold. Further, the low prices

caused by the excess supply in the short run mean that more oil is being consumed.

This ensures that less oil will be available later to supply the world. The long term

prediction is certain- as oil becomes even scarcer and supply dwindles, the price will

rise exponentially if demand has not curbed by renewable energy sources (Baye & Beil,

2006). Either market demand will shift to the left, or prices will rise sharply (Baye & Beil,

2006). The result will be a dramatic rise in the price of oil, although it can be assumed

that by that time demand shifters will have been implemented. If not, it will be a

producers market and many will not be able to afford this resource.
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References

Baye, M. R., & Beil, R. O. (2006). Managerial economics and business strategy (Vol. 5).

New York, NY: McGraw-Hill.

Plumer, B. (2015). Why oil prices keep falling and throwing the world into turmoil.

Vox. Retrieved from: http://www.vox.com/2014/12/16/7401705/oil-prices-falling