An Oil Price Primer

By Angela Su

Source: Oil Boom USA

Source: Oil Boom USA

Oil prices in the U.S. dropped to a six-year low in late August of this year, recovered quickly to almost $50 a barrel in early September, reached a 1-month high last Wednesday, and have declined since then. Wednesday saw a decrease of 1.5 percent to $47.81 a barrel on the New York Mercantile Exchange. Since oil plays a pivotal role in the economy via its effect on transportation and energy costs, it’s worthwhile to both trace the movements in its price and explore the underlying causes of said movements.

The recent seesaw of oil prices over the last couple of months is reflective of a pattern of larger swings in oil prices this year compared to the past decade. In August, prices reached as low as $40 a barrel and were as high as $60 in March and April — the longest rally this year.

Sixty dollars a barrel is considered by analysts to be the cap for oil prices extending from 2015 to 2016, since when prices reached that point in April, producers began raising their rates of production, subsequently increasing supply and lowering the market price.

The fluctuations in oil prices are generally predicted by market analysts and seen in data collected by government and industry companies regarding the supply of oil in the U.S. Following basic economic theory, a predicted or reported increase in supply leads to a decrease in price, and the opposite is also true. The oil and natural gas obtained from shale in the U.S, despite its slightly more expensive costs compared to conventional oil methods, has reduced required imports, increased supply, and contributed to an overall steady decline in U.S. oil prices. The reversal on Wednesday can be attributed to government data released that day, which described a record high jump in the U.S. inventories of crude oil and refined fuels.

The market for oil is as volatile as it is unpredictable, easily affected by minor changes to the commodity. Combined with inaccurate and contradictory data on oil supply and demand, root causes of fluctuating oil prices can be difficult to determine, and future trends almost impossible to predict. The Energy Information Administration reported a 7.6 million barrel increase in the week of Oct. 5, which was higher, by 2.9 million barrels, than an amount predicted by analysts in a Reuters poll, but lower, by 1.6 million barrels, than the amount reported by the American Petroleum Institute this past week. The lack of consensus among industry experts and economic analysts further complicates an already unpredictable pattern of swinging oil prices.

The sharp declines in oil prices, seen in both 2014 and 2015, from global overproduction and U.S. shale methods, have been slightly offset by a slow upwards-creeping demand. Oil prices were slightly boosted when the Energy Information Administration released forecasts for 2016, showing an increase in demand for oil. However, analysts are skeptical about the lasting power of increasing demand for oil. What little boost positive forecasts provide to oil prices is still overpowered by the massive overproduction through the shale industry of last year.

The ramifications of declining oil prices are far less severe for the U.S. than they are for other countries invested in oil. While the recent shale-oil market has boosted economic growth in the United States, the U.S. economy as a whole remains extremely diverse. The damage that low oil prices can cause to the oil market in the U.S. is balanced by the many U.S. manufacturing industries in which oil and gas are major factors of production.

Decreasing oil prices are far worse for countries whose economies are tied to oil, like Russia and Saudi Arabia. With the recent global decline in oil prices, Saudi Arabia, a land rich in the natural resource of oil, has suffered a budget deficit of more than 20 percent of its GDP. Compared to countries like Saudi Arabia and Libya, whose oil production has been additionally damaged by conflict, the U.S. is much more balanced and able to survive a blow to its oil market.

This Friday, oil prices recovered slightly by 1.9 percent to $47.26 a barrel on the New York Mercantile Exchange, due not to demand, but to slowed U.S. production and speculation over meetings between two major global oil presences: OPEC and Russia. The nervous speculation is over the supposed topic of supply cuts. By far, the largest contributions to the stabilizing oil prices are the declining U.S. crude oil production rate and the decrease in U.S. oil product stocks, both tentative signs of future relief from the massive U.S. oil glut. The perplexing oil price see-saw seems set to continue into the future, with unknowable and unpredictable effects on the United States’ future, both at home and abroad.

One comment on “An Oil Price Primer
  1. Thanks Anglea. This is very interesting. What is your assessment of why Saudi Arabia would run a 20% deficit when they could simply cut production and raise the price of oil (or is this assumption no longer true with Bakken Crude etc.?). Also, what is the effect of the US oil export ban on the price in the US? Outside the US?

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