The situation of the oil industry today is ridiculous. The price of a barrel of oil has decreased by more than 60 percent since June 2014.
The explanation to this question (and to a large number of economic questions) is simple: supply and demand. For those of you that have never taken an economics course, supply is the total amount of a specific good or service that is available to consumers, and demand is the willingness to pay a price for a specific good or service. Under the current circumstances, there has been an increase in supply followed by a decrease in demand. Hence, oil prices have fallen.
So why is this the case? The U.S. has nearly doubled the domestic production of oil over the last few years. Canada and Iraq have been increasing oil production on a yearly basis. And now, after the recent nuclear deal, even Iran is expected to become a major exporter of oil. All of these factors have greatly increased the supply of oil. Usually, when oil prices decrease immensely, OPEC, a cartel of oil producers, decreases their production of oil. This reduces oil supplies and increases the price of oil. However, officials of Saudi Arabia, which happens to be a country member of OPEC, have said that the nation is not reducing its production of oil because they will lose market share when these actions increase prices. The reduced demand for oil is mainly due to the fact that the economies of Europe and developing nations are weak and that the fuel-efficiency of vehicles is constantly improving.
Are these price drops good for everyone? No. While consumers get to enjoy cheap oil prices, Middle Eastern nations, as well as countries like Venezuela, whose economies depend on the export of oil, are greatly suffering due to these price drops. Oil exporting states in the U.S., which are Alaska, North Dakota, Texas, Oklahoma, and Louisiana, are facing economic issues as well. Even oil-producing companies such as Chevron, Shell, and BP are being hurt, although not as badly as smaller independent oil producers.
To conclude, while most of you are enjoying the cheap gas prices, which are expected to stay this way for a few more years, you should also be aware of the reason for this situation.
Pranit Garg
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