The Price Of Oil, Natural Disasters, Economic Trends And The Lack Of Regulation

Several oil-countries have been facing economic and political turbulence as a result of the crash in oil prices, and there is disagreement among OPEC as how to handle the situation. (Krauss) While this is happening, America’s oil production continues to rise, as it inches closer to becoming an energy superpower in production and consumption; and countries that depend on their oil exports face recession.

Oil is the product that each and every one of us use. It can be used for fuel, heating and even cooking. The most often known for unstable price is crude oil or gasoline. According to the The Economist, The main reason for price shifts of oil is oversupply. The oil production in Saudi rose 10.3 million barrels per day. This increase is the effect of a new method that I being applied to oil extraction. This method is called fracking, fracking is where they drill into tight-rock formations then gradually turning horizontal for several thousand feet more. This results to accommodations to multiple oil wells. This new approved method of oil harvesting has raised the productivity gains and reduced the cost of harvesting oil.

High oil price for last few years drove the energy industry to come up with a new technological innovation and the result is a new drilling technique like hydraulic fracturing. This new technology made drilling easy in North Dakota and Texas (Timiraos, 2014). With more oil drilled domestically, U.S became net energy exporter instead of an importer. Also falling demand due to energy conservation, more efficient cars, less demand in China and OPEC opted against cutting production levels made the price go down. When Global economic growth was slowing and most economists agree that both supply and demand played role in the last year oil price plunge. Driven by the increased supply, oil price dropped from $82 to $50 between Oct'14 and Jan'15. The IMF summarizes 58% of the drop in oil price to supply and only 42% to demand.

The U.S. was supposed to be the world’s new swing oil producer, able to nimbly open and close the taps in response to market forces, thanks to its bounty of shale fields.” In the past a barrel of oil has been one hundred dollars, recently it has dropped to thirty dollars. Though some wells can be profitable at low prices it puts a serious strain on the oil industry as explained in this article.

Oil is a limited commodity with an unlimited demand. Very few nations have the luxury of having their own supply to which they can fulfill their own needs, while other countries clamour for what they can get . The countries with oil realized instead of competing with one another on exports , it would be much more profitable to simply work together and cooperate in their production of oil, rather than compete. In doing this, these countries will then be able to influence the market magnitudes more.

Since 2008 many oil companies in the US have been selling 3.5 million barrels more than they did because the oil prices go up and down constantly. In New York the oil price has dropped nearly half in six months. Out of the 12 biggest oil producers in the world most all of them are in the Middle East because they don't have many jobs over there except drilling oil. The US is the biggest buyer of oil. China, Japan and then Western Europe are some other big buyers but they are slowly buying less and less. More oil is pumped than the world needs, that is why the prices of oil are going down. People that drive in vehicles are clicking their about this but oil companies are scratching their heads because they aren't making that much money.” Anytime

OPEC had been successful in heavily influencing settling price in the oil industry prior to the oil shock of 1973. This event gave outsiders the opportunity to explore alternatives to oil resources and subsequently reduced the market share that OPEC

The recent drop in the price of crude oil by more than half since June 2014 involved complex causes, but much of the problem stemmed from an imbalance of supply and demand. The oil industry thrives on advances in science and technology and historically has proven remarkably adept at producing knowledge and techniques to locate, process, and transport oil but ill-equipped at using its investments into industrial research and development to create market stability. For example, American energy production has boomed in recent years due to advances in hydraulic fracturing and horizontal drilling but those innovations created vulnerability for American oil producers and particularly for smaller independents when world production outpaced consumption and prices dropped.

The consumption of the oil cause changes in the supply and demand. The United States produces 11 million barrels of oil every day. We are one of the biggest countries to have a big influence on the production and prices of the oil. The basic supply and demand theory explains that the if a product is produced more, the cheaper it should sell. If a country were to double the output of oil day, prices would fall and the Production is high, but the distribution of oil isn’t keeping up with the market. The United States builds an average of one oil refinery per 10 years. This is a net loss due to the fact construction has slowed down since 1970s. Since 1970s, the United States has 8 less oil refineries today. The reason why we are not oversupplied with cheap oil is because of the other countries’ higher net margin and the only operate at 62% of their capacity. Excess capacity is only there to meet future demand. With demand moving accordingly, oil prices will continue to be set mostly by the market — despite external players’ best efforts. (McFarlane)

Oil resources are the focal point of almost all international disputes in the present century as every country needs oil to power its electrical grids, run its automobiles, and operate its machinery. The vast majority of accessible oil lies in the extremely unstable Middle East, whose countries form most of OPEC and have a viable monopoly on oil production and pricing. The troubles caused by this situation thus come to no surprise as high demand and monopolistic supply give omnipotent control to the supplier.

It is said that OPEC as a cartel has been unfruitful is maintaining the price levels. Some say that OPEC and Saudi Arabia are purposely not relenting to reduce the production as oil production from Shale Gas formations is much more expensive than oil production at Saudi Arabia (~$5-6/barrel) which is the lowest in the world. OPEC and Saudi Arabia hope to wipe out the Shale Gas producers by the continued fall of crude oil price levels to less than $50/barrel after which it is believed that it would be unviable for the Shale Gas producers to continue.

Then, the landing journey of oil prices had begun, and the price of Brent crude was averaged $ 57 a barrel (See figure.2) . The sharp decline in the oil prices in the years followed by suspending the sanctions, it has not due to the return of Iran to the market only, but in addition to other factors contributed to it. With the passage of time. it has been flooding the market with large quantities of oil and the price fall to $ 28 a barrel, which is sounding the alarm in the OPEC.

The history of the oil industry started off smooth and inexpensive, but as years went on, more and more uses came of the commodity which drove its value up significantly. There is a lot of money to be made in the oil industry, likewise, there is a lot of money to be lost. The formula to make money in this industry is not so much controlled by the supply and demand of the product as much as it is the cost of extracting and refining the raw material. Configuring the price of oil is great for the profiteers, but not so good for the consumer at times. The big question is, who is controlling the oil supply for the States and how the prices are determined?

This organizations was founded on the hopes to “coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a[nd] steady income to producers”(OPEC). In order to achieve this OPEC must be capable of maintaining a stable market, which is a task that non-OPEC producers cannot and will not do. To do this, supply and demand must always be perfectly balanced so as to keep prices within a range deemed reasonable (Cavallo 21).

Another cause for the decline in oil prices is caused by an increase in consumers purchasing more fuel efficient vehicles, such as hybrid or electric vehicles. In many countries today, especially in North America, there has been a surge demand for fuel efficient vehicles. This is evident in TV commercials which are advertising more and more vehicles that get 40 to 50 miles per gallon, and by the proliferation of commercials for electric vehicles. Consumers are tired of paying outrageous prices for oil and are demanding more for their money. As this demand continues to grow, the demand for oil will plummet.