WHAT IT IS
- The price of oil depends on two main factors: 1) supply and demand and 2) speculation by traders on the futures market.
- Until recently, global oil prices had been almost exclusively controlled by OPEC, who exports most of the world’s oil.
- Thanks to the advances in fracking technology, the U.S. has experienced a “shale revolution” which has catapulted it to one of the most oil rich nations in the world.
- Oil prices are notoriously volatile and fluctuate frequently.
WHY IT MATTERS
The price of oil affects the price of almost everything we purchase. The new, lower-price environment, should benefit the U.S. consumer in the form of cheaper gasoline, heating oil, etc. The rise of this industry has also created thousands of jobs. By producing oil domestically, we are also now less beholden to foreign oil.
WHERE WE ARE NOW
- An oversupply led to a collapse in oil prices starting in 2014 (dropping to as low as ~$26/barrel) but prices have since rebounded from their recent lows and currently reside around ~$50.
- Despite the rebound and the cut in OPEC production, oil inventories / reserves around the world remain high keeping oil prices at a somewhat stable level.
- OPEC, Russia, and other oil producers agreed to cut production starting January 1 through the end of June to increase prices and reduce supply; Saudi Arabia recently expressed interest in extending the cuts when the group meets in May.
THINGS TO THINK ABOUT
- Will OPEC continue to limit production to maintain price, or decide it cares more about market share and trying to drive shale companies out of business?
- How quickly will alternative energies (wind, solar, etc.) develop and potentially create a sizable dent in oil demand?
- Oil prices are always subject to any geopolitical or economic turmoil. What will the next market disruption be, and how much will prices spike?