As this week started, oil falls below $30 a barrel. On Jan. 18, it finished at $28.94 a barrel. There is a huge discrepancy considering that in May 2015, crude oil traded as high as $65.50 per barrel. For the past few years, West Texas Intermediate traded between $80 and $100. Brent on the other hand, traded between $100 and $120 before its prices declined in 2014.
Major Reasons Why Oil is Low
- There is simply a lot of oil for everyone.
While the expectations that the 40-year-old ban of crude oil exports by Congress in December will allow US consumers to pay less than $2 per gallon of gas are met, the decision doesn’t really create an immediate impact in favor of the consumers. American oil is not yet flowing worldwide, especially now with the extremely low prices.
Oil surplus is the ultimate reason why prices are hitting as much as 11- to 14-year low. With the surplus, exporting American oil isn’t lucrative yet even after the 40-year-old ban. US oil producers will have to wait as worldwide production of oil has overtaken demand since the summer of 2014.
Also, there is so much oil in America right now as evidenced in a data by the Energy Information Administration. Stockpiles at Cushing, Oklahoma increased while nationwide stockpiles remain about 100 million barrels above the five-year average.
- Saudi Arabia increases oil production, as is Iran, and other OPEC-member countries.
While the tensions between Saudi Arabia and Iran may have largely contributed to the plunge of the oil prices, these two countries are not cutting back on its respective production. Saudi Arabia, the world’s largest oil exporter, produces 10.23 million barrels daily. The Arab world alone consumes 9 million barrels of oil daily, close to 10% of the world’s share. The oil industry keeps expanding in the region and the country’s oil minister has said that there is a need for an increased production to cater to the needs of all consumers across the globe.
Now that the economic sanctions imposed on Tehran more than two decades ago over its nuclear programs are lifted, Iran is now poised to produce 500,000 barrels daily. This would then contribute to further low prices.
So why is the Middle East not cutting back on oil production? While the US is not yet on the front lines in terms of oil production, Saudi Arabia and Iran for example, want to keep their customers. They will take advantage as much as possible of the time available before the US begins exporting oil and gas to world markets for the first time since the early 1970’s.
- Renewable energy becomes more cost-effective and affordable.
While the Saudis are dependent on oil exports for 85% of their revenues, they also saw that one day they will run out of customers for it. Last month’s agreement by 195 nations during the global climate change meeting in Paris on the reduction of hydrocarbon fuels consumption will literally make renewable energy more affordable and available. Naturally, rising climate change concerns, production of electric vehicles and biodegradable fuels, solar panel purchases, and other industry-efficient manufacturing processes will lure consumers and business owners away from oil.
Some Implications of the Low Oil Prices
While the daily consumer can largely benefit from the low prices and give more opportunity for saving and spending, this situation actually hurts businesses. For example, fewer incentives will be given to companies trying to develop cleaner alternatives to fossil fuels.
With low oil prices comes US stocks plunging. Major stock indices are off to their worst two-week start in 2016. Imagine what it will do to your 401(k) balance that will obviously go down because you directly or indirectly own some oil stocks.
Over 30 US oil companies, which currently owe $13 billion, have now filed for bankruptcy. Oil and energy companies have already left 123,000 individuals without jobs since the end of 2014. At the same time, banks and investment firms may also cut back on funding projects by oil companies.
For the investor, this can be a perfect time to purchase investment vehicles because when the market is down, more options are available to you.
But what investments are best? Reach out to us to find out.