Oil Prices Are Falling, But Why Exactly?

Published on January 7 2016

This is definitely not an easy question but the answer simply lies on economies of scale;dictated by supply and demand. According to economics, when supply is high, price is down. On the other hand, when the demand of a commodity is low, the price of that commodity goes down. This two business axioms are responsible for the low oil prices.


Let us find some of the reasons as to why crude oil prices are low right now.

Production

Necessitated by the negative effects of high oil prices on their economies,many countries started producing oil.Increased production of oil has caused a significant drop in oil prices. For the last six years, the United States and Canada have increased production of oil in their countries. The United States Domestic production is almost twice of what it was in the last decade. United States has been one of the greatest markets for oil in the world. Being one of the most developed countries and with a very high population, the market it provides for energy and oil is definitely extremely huge. Unfortunately, Increased production of oil in the United States has led to a reduction of oil imports from Middle East. This has forced countries like Kuwait and Saudi Arabia to reduce their crude oil prices so that they can attract other markets from emerging economies. Emerging economies cannot afford to pay the same price for oil as the United states. Canada, like their neighbors, has also stepped up it's oil production hence adversely affecting the market for oil in North America.


Demand and price are indirectly proportional. If the demand is low, the prices will go down.

Global Recession

You will realize that most countries are currently either going through recession or recovering from it,especially countries from Europe. Europe is another large market for oil, when its economy suffers, then the countries in Europe will not have enough money to use on imports such oil. Recession has also reduced the rate at which countries are carrying out their development agendas.Development and energy are tied at the hip. There can not be development without a source of energy.This has led to a significant drop in crude oil prices because of lack of market. Countries are no longer undertaking development initiatives because of luck of funds. Therefore to sustain companies and attract market, many oil producing countries in the world are forced to reduce crude oil prices.

Industrialization

The ever evolving oil prices and climatic concerns have also triggered use of alternative sources of energy such as Solar energy.You will realize that companies are today manufacturing cars which are solar powered.You will also realize increased use of bio gas to power machines.All these sources of energy have a negative effect on crude oil prices.These alternative sources of energy are cheaper as opposed to oil hence many people will tend to choose them over oil. Therefore, for oil producers to remain in business and compete with these emerging sources of energy, they are forced to reduce prices to levels that can ignite competition.

Middle East Unrest

It is said that the political turmoil in middle east has also helped to reduce crude oil prices.Majority of Oil fields are controlled by rebels who sell the oil at very low prices.Definitely,the rebels do not need the money to build infrastructure or run governments.Therefore, they do not need to fetch a lot of money from the oil.The effects of these low oil pricing trickles down to the consumer.

Saudi Arabia

After Saudi Arabia realized that the prices of oil are going down due to increased production of oil from countries that were initially their customers,they decided to reduce the price of oil so that they can collapse and discourage these countries from producing oil due to low prices.Saudi Arabia banks these policy from the fact that they have the biggest oil reservoir in the world hence a drop in oil price can not effect their economies to very devastating effect.

Written by DaveS

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