If Americans are happy with one thing it is the falling gas prices. Prices have significantly decreased in the last 5 months and in some areas, gas is under two dollars, a phenomenon that has not happened in at least a decade. Since last summer oil prices have dropped fifty percent to about fifty dollars per barrel. While most Americans are satisfied with the incredible price drop, economists are skeptical that it will continue and are worried about the global impact.
Why has the price of oil dropped significantly? The reason for this ridiculous price drop can be explained by the economic principles of supply and demand. Since the integration of hydraulic fracking, the United States’ oil production has significantly increased, causing foreign companies to find a different market for their oil. Furthermore, the foreign oil that was being imported to the US are suddenly competing for Asian markets and in order to survive, are having to drop their prices. In addition, the supply has not decreased one bit. The Arab countries, fearing of losing their market share, are deciding not to decrease their production. The oil exports of Canada and Iraq are also rising every year. Even Russia with all its economic turmoil is continuing to produce oil. This increase in supply of oil combined with a decrease in the market for oil is causing the drop in prices. In terms of demand, the economies of Europe and developing countries are weakening, and an increase in energy efficient cars is causing a decrease in the demand for fuel.
Who’s benefiting from the recent drop in oil prices? The American Consumer and high oil importing countries such as China and India. This is primarily because the amount of oil that these countries import is higher than the amount that they export. With prices dropping, American motorist are benefiting greatly. Everyday six hundred and thirty million dollars is being saved with each household saving around one thousand dollars this year. This greatly helps low-income households since fuel takes up a large portion of their income.
Who’s losing? In the United States, oil-producing states are under a lot of pressure. With gas prices being so low, companies are earning less for the same amount of demand. This may cause some refineries to shut down and small oil companies to go out of business. Additionally, there is potential for many Americans to become laid off. Countries that have economies dominated by oil such as Russia and Venezuela will also see the impact of the oil price. Similar to oil producing states, in these countries, the GDP will significantly decrease causing the economy to weaken. When the economy weakens, there are less foreign investors using their respective currency, causing the value of their money to drop. This is a significant issue for Russia. Oil accounts for fifty percent of Russian economy. When the oil prices dropped, combined with Western Sanctions put on Russia for their actions in Ukraine, it caused the Russian economy to be in turmoil and the people to suffer. The Russian Currency, which was at around 35 rubles per dollar, has now dropped to 65 rubles per dollar. In third world countries such as Nigeria, they use the revenue from the oil to fund the military. Without the military, coups might emerge and overthrow the government, which has happened numerous times.
The big question is how long will this last. Although the prices may increase a fraction with the summer months coming, economists predict that the oil prices will not revert back to its old price anytime soon. So take advantage of the low prices while it lasts because we all know that feeling when the meter keeps on going up.
Benen, Steve. “Why the Sudden Drop in Gas Prices Matters.” Msnbc.com. NBC News Digital, 01 Dec. 2014. Web. 10 Feb. 2015
Kitroef, Natalie, and Joseph Weisenthal. “Here’s Why the Russian Ruble Is Collapsing.” Bloomberg.com. Bloomberg, 16 Dec. 2014. Web. 10 Feb. 2015
Krauss, Clifford. “Oil Prices: What’s Behind the Drop? Simple Economics.” The New York Times. The New York Times, 12 Jan. 2015. Web. 08 Feb. 2015
Oil Prices’ ‘Spectrum of Pain. Prod. Quynhanh Dp. Perf. Carlos Pascual, Helima Croft, and Pedro Rafael Rosado. Nytimes.com. New York Times, 27 Jan. 2015. Web. 9 Feb. 2015.