Why has the price of oil fallen so much recently?

Three things have contributed: first, due to their slowing economies, demand has fallen in China, Japan, and the EU. Second, oil production has increased here in the US so we are importing less. And third, despite sluggish demand worldwide, Saudi Arabia (the world’s biggest producer) has not slowed down exports. All these factors mean that the world temporarily has more supply than demand, and this has naturally forced down prices.

You may have noticed that this has benefited American consumers, and has lowered many costs for American businesses. On the other hand, it has strengthened the US Dollar relative to other currencies, making American exports less competitive. Some companies with a global presence are hurting, and individuals may be finding evidence of this in their investment portfolios. Such conditions are not likely to improve until the dollar weakens.

So what will happen next? Some economists expect the price of oil to remain relatively low for the next year, possibly two years, before climbing again as US production falls. That one or two years will seem like an eternity though for many fossil fuel companies. Fueled on credit, the industry expanded rapidly over the past several years. With the price of their product halved some fossil fuel companies may now find it difficult to meet the terms of their enormous loans, and this may leave their creditors in a very difficult place. Economists therefore warn of a potential crisis in the banking industry again, which of course would have further ripple effects on the economy overall. Are you prepared for another credit crunch?

With prices so low, oil companies are pulling back from ocean drilling and other high-cost, low-return projects. This will contribute to a slow down of supply, and in one or two years the temporary return to familiar territory of our supply:demand ratio and price. What should us individual and business consumers do? Rather than plan our future around a volatile past, the savvy among us will build foundations for the future on reliable economic theory and solid science.

Worth considering:

How would gasoline at $1 per gallon impact you or your business ten years from now? How about at $10 per gallon?

How would another banking crisis impact you or your business two years from now? How about ten years from now?

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