What’s Behind the Drop in Oil Prices?

oil rig

It’s nothing new for the oil market to rise and fall over and over. But right now, the industry is in one of the deepest downturns since the 1990s.

With earnings down, the companies that previously made record profits gouging us left right and center, the downturn has led to the decommissioning of more than two thirds of their rigs. This has sharply cut investment exploration and production, with scores of companies actually going bankrupt, and putting an end to at least 250,000 jobs for oil workers.

The price of a barrel of oil has taken a steep nosedive, falling more than seventy percent since June of 2014. And whiles prices have recovered here and there, the cost of a barrel has still sunk to levels not seen since the early 2000s.

Contributing to the oil glut is the fact that Iran returned to the international market after sanctions were lifted. Previously, the country was under sanction under an international agreement with world powers to restrict nuclear work.

Analysts predict that it will be years before the price of a barrel of oil returns to the $90 – $100 mark, which has been the norm over the last decade.

At present, bent crude, which is the main international benchmark, is trading at around $42 a barrel – I huge decline. So what’s causing this?

The bottom line in terms of simple economics, is supply and demand. With US domestic production nearly doubling over the last few years, oil imports are peddling their wares elsewhere. For example, Algerian oil was once sold to the US, but is no having to compete in Asian markets. This competition is leading to price drops. And while this is going on, Iraqi and Canadian oil production and exporting is on a steady rise year over year. Even Russia is still pumping oil in spite of terrible economic issues.

Production is still falling however. RBC Capital Markets calculate that projects capable of producing more than a half million barrels daily have been cancelled, delayed or shelved by OPEC countries just in the last year. And there’s more to come.

The drop in production is moving slowly though. Output sources from the deep waters of the Canada and Gulf of Mexico are still building new projects. As far as demand, European economies and developing countries are still weak.

A major contributing factor is that vehicles are becoming more energy efficient, and the push is on to go electric. This further reduces the demand, which is playing a big part in the downturn.

So what’s the bottom line? Lower prices at the pump, something none of us are likely to complain about. Even the prices of heating oil, natural gas and diesel are falling.

Visit any gas station in your neighborhood and the prices will bring back fond memories. In the US, regular gas is going for around $2 per gallon, and in Canada, you can fill your tank for around $1.03 in some cities.