Friday, February 26, 2016

Oil prices "barreling" downwards




The price for a barrel of oil recently reached its lowest point since 2004. The decline started in June 2014, and has led to oil companies yielding significantly lower profits. This caused a notable scaling-down in the oil industry, with hundreds of thousands of workers unemployed and several companies going bankrupt (New York Times).

One explanation for this is that the competition for oil exporters has increased, causing producers to lower prices to stay competitive. Previously, Middle Eastern countries used to dominate the oil industry. However, Canada and Asian countries have started distributing oil, forcing the price down as well. Also, the demand is falling due to the increasing prevalence of electric cars and hybrids (New York Times).

Despite the fact that oil prices have been dropping for so long, some investors are still optimistic that the prices will rise once again when production catches up with the decreased demand. However, this is risky because the countries that are newer to the oil industry are showing few signs of scaling down and reducing production (The Week and New York Times).

I think that it will take quite some time for oil to start increasing in value again. Considering that there has been overproduction since 2014, I do not see it re balancing any time soon. Looking at the supply and demand graphs from the second NYT article, it seems that there has not been a production imbalance that has lasted this long since 2000. The fact that it is taking so long for production to start matching demand could cause bigger issues in the future. However, some people might consider this to be good news since it means that people are becoming less dependent on fossil fuels.

Do you think that oil prices will go back up any time soon? Why or why not?
What do you think would happen if supply continued to increase faster than demand?
In the past, production only exceeded consumption for short periods at a time. How come the industry has stayed like this for so long now?

Sources:

http://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html

http://www.nytimes.com/interactive/2016/business/energy-environment/oil-price-supply-demand-imblance.html

http://www.theweek.co.uk/oil-price/60838/oil-price-why-the-market-is-completely-out-of-whack/page/0/1

2 comments:

Jack Loar said...

I think that oil prices will go up relatively soon because there is a limited supply of oil and still an every growing demand. While there has been a reduction in demand recently, I think it will be a long time before there is very little to no demand for oil. The supply is going to dry up soon enough so that the price of oil will go back up.

Tara Young said...

I agree with Jack that the oil prices will go up again. Oil is a scarce resource as it takes a long time for more to be made within the earth. There is only so much. Additionally, the demand will continue to grow. Every year, there are hundreds of thousands of new drivers and with drivers are cars which need gas. Even though there is an increase in hybrids as stated in the article, they still use gas. Even if the supply continued to increase faster than the demand, eventually the supply will cease to increase and the demand will remain there. I think the industry has stayed like this for so long because again as stated in the article, new technology is replacing cars that use gas with electric and hybrid cars, but there are still new and old cars that run solely on gas.