OIL PRICES: What’s behind the drop? Simple Economics


For those street and ghetto economists, here’s a place to start arguing. I haven’t found an Euclid type book yet, though. Any recommendations?

Dateline 2015-08-23, Malaysian Chronicle:

The oil industry, with its history of booms and busts, is in a new downturn.

Earnings are down for companies that have made record profits in recent years, forcing them to decommission more than half their rigs and sharply cut investments in exploration and production. More than 100,000 oil workers have lost their jobs, and manufacturing of drilling and production equipment has fallen sharply.

The cause is the plunging price of a barrel of oil, which has been cut roughly in half since June 2014, reaching levels last seen during the depths of the 2009 recession.

Prices recovered a bit in the spring, but have fallen again in recent weeks. Executives think it will be years before oil returns to $90 or $100 a barrel, pretty much the norm over the last decade.

What’s the current price of oil?

Brent crude, the main international benchmark, was trading around $45 a barrel on Saturday.

The American benchmark was at around $40 a barrel.

Why has the price of oil been dropping so fast? Why now?

This a complicated question, but it boils down to the simple economics of supply and demand.

United States domestic production has nearly doubled over the last six years, pushing out oil imports that need to find another home. Saudi, Nigerian and Algerian oil that once was sold in the United States is suddenly competing for Asian markets, and the producers are forced to drop prices. Canadian and Iraqi oil production and exports are rising year after year. Even the Russians, with all their economic problems, manage to keep pumping.

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