Oil Prices: What’s Behind the Drop? Simple Economics

08-Jan-2016

The oil industry, with its history of booms and busts, is in its deepest downturn since the 1990s, if not earlier.

Earnings are down for companies that have made record profits in recent years, leading them to decommission nearly two-thirds of their rigs and sharply cut investments in exploration and production. More than 200,000 oil workers have lost their jobs, and manufacturing of drilling and production equipment has fallen sharply. 

The cause is the plunging price of a barrel of oil, which has been cut roughly in half since June 2014.

Prices have recovered a few times this year, but executives think it will be years before oil returns to $90 or $100 a barrel, pretty much the norm over the last decade.

Why has the price of oil been dropping so fast? Why now?

This a complicated question, but it boils down to the simple economics of supply and demand.

United States domestic production has nearly doubled over the last six years, pushing out oil imports that need to find another home. Saudi, Nigerian and Algerian oil that once was sold in the United States is suddenly competing for Asian markets, and the producers are forced to drop prices. Canadian and Iraqi oil production and exports are rising year after year. Even the Russians, with all their economic problems, manage to keep pumping.

There are signs, however, that production is falling in the United States and some other oil-producing countries because of the drop in exploration investments. (by  CLIFFORD KRAUSS, New York Times)