U.S. Role in Oil Prices

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.

  • Pro-Shale Oil…. “Drill baby drill”

    • Miss Independent: The “shale revolution” has brought the U.S. closer to energy independence, which is economically and politically beneficial as it reduces any leverage oil producing countries may have over us.
    • The price is right: Extra supply in the oil market means oil prices will stay lower than their recent $100+ peaks, which results in savings for consumers.
    • Let’s get to work: Growth of the oil industry has created thousands of well-paying jobs.
  • Anti-Shale Oil…. “An Inconvenient Industry”

    • Fracking is dangerous: Many environmentalists believe fracking contaminates water supplies and destabilizes the earth leading to earthquakes.
    • Over-reliance on fossil fuels: Fossil fuels are the main catalyst behind global warming. We should be focusing on developing alternative energy sources such as wind and solar.
    • OPEC: OPEC has lost influence and billions of dollars as a result of the increased supply coming from the U.S. – at one point the organization tried to crowd out shale companies by pushing the price of oil so low that they were not profitable.

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?