ARLINGTON, Virginia — Some of the world’s most prominent oil producers are in the midst of social upheaval and economic unrest. Libya, Iraq, Nigeria and Syria all find themselves facing real political conflicts and Iran continues to battle strict sanctions. Despite this looming sense of turmoil, crude oil prices have been declining dramatically. A decade ago this would never have happened, so what does this decline mean?
According to Robin West, a senior advisor with IHS Global Insight, the answer is a simple problem of supply and demand.
A recent energy boom in the United States contributed to an international supply increase.
However demand has witnessed a steep decline, according to the International Energy Agency. The IEA attributes this to slow markets in China and Europe.
Oil exports from fracking in the U.S. have created a sense of stability. This upswing in American exports came as Libya’s declined and Syria’s stagnated. Furthermore, sanctions against Russia don’t present immediate threats to production. This has kept the oil market’s waters relatively calm.
Stanley Reed of The New York Times noted that many saw the drop in prices as a deliberate response to Saudi Arabia’s indication that it was more inclined to maintain market share in lieu of defending prices.
“I think there is excessive complacency in the ability of the global oil market to absorb disruptions that we haven’t seen yet,” said senior fellow for energy and the environment at the Council on Foreign Relations, Michael Levi.
Recent sanctions against Russia will have long-term implications on the nation’s economy. They have also seemed to pin the American-Saudi oil alliance and the Russian-Iranian one distinctly on two opposing sides of an economic battle. Some have posed the question, is this war by oil?
Some like Levi critique the simple supply and demand explanation, given the potential blow to Russian and Iranian markets. Revenue from oil exports account for more than half of both country’s government revenue.
Although consumers may rejoice at the pump, the bigger picture could mean an eventual economic downturn for the U.S. as well. According to Goldman Sachs, $85 a barrel is the cut off for U.S. producers to make a profit.
The expansion of fracking has been vital to the economic recovery in the United States. Fracking hub North Dakota takes 11.5 cents of every dollar the oil industry makes and the unemployment rate is below one percent, according to The National Geographic.
But its safety and sustainability has come into question. President of the Federal Reserve Bank Narayana Kocherlakota called the boom a one-time windfall. The state, according to the American Wind Energy Association, is a top candidate for harnessing and profiting from sustainable wind energy.
Head of oil research for Oppenheimer & Co. Fadel Gheit predicts that this is only the beginning of a decline in oil prices if fracking technology continues to develop. According to Gheit, the new technology reduces price of production.
“Yes, we needed $80 [per barrel]oil for the North Dakota Bakken oil development to continue. Now, it’s about $65. Five years from now, it could be $50, or even $40,” he said.
Although this indicates long term problems for countries like Russia, Iran and the U.S., these prices are economically positive for some poor countries, some argue. John Baffes of The World Bank notes that agriculture relies more on energy prices than manufacturing, thus cheap oil benefits the world’s poorest farmers.
In India for example, oil accounts for about a third of the country’s imports, while their exports are more diverse. According to The Economist, low oil markets only make their imports cheaper with no real effect on cost of exports. This moderated India’s inflation, which went from 10 to 6.5 percent in 2013.
For most governments, the immediate effect of falling oil prices is modest. Many economists warn however that they will escalate with time. The era of $100-a-barrel could be over. With this uncertainty in a changing market, the long term effects on policy remain unforeseen.
– Ellie Sennett
Sources: National Geographic, CBS, The Economist
Photo: International Business Times