The Markets

12.30.14

With gas hovering around $2 a gallon in many parts of the country, chances are you’re smiling every time you fill up the tank.

The oil price drop, which is one of the biggest stories of 2014, is a twist on a familiar tale. Rising supply (production in non-OPEC countries, like the United States, increased) and falling demand (in Europe, Japan, and China) caused prices to move lower. In this case, they’ve moved a lot lower. Last summer, the price of crude oil was about $107 a barrel. Last week, it finished below $55 a barrel.

Overall, according to the International Monetary Fund (IMF), lower oil prices are expected to be good news for the global economy. They’re expected to have economic benefits for countries that import a lot of oil, like China and India. They also are a boon for U.S. consumers who have more money in their pockets when they pay less at the pump.

However, low oil prices aren’t good for everyone. In the United States, oil-producing states like Texas, Louisiana, Wyoming, Oklahoma, and North Dakota may lose jobs and tax revenues. Outside the United States, oil exporters like Russia, Iran, Nigeria, and Venezuela are likely to suffer adverse consequences as a result of falling prices, including domestic unrest, according to MarketWatch.com. The International Energy Agency (IEA) said,

“…For producer countries, lower prices are a negative:  the more dependent on oil revenues they are and the lower their financial reserves, the more adverse the impact on the economy and domestic demand. Russia, along with other oil-dependent but cash-constrained economies, will not only produce less but is likely to consume less next year.”

The supply and demand equation isn’t likely to change soon. The IEA forecasts global demand growth will be relatively weak during 2015. Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) has done nothing to reduce supply, largely because of Saudi Arabia which is the second largest oil producer in the world. Saudi has reserves that make it better able to absorb the oil price shock than other oil exporters. It also has political motivations to keep oil prices low. These include punishing Iran and Russia for supporting Bashar Assad in the Syrian Civil War, according to the International Business Times.

If you want to know where oil prices may go, keep an eye on Saudi Arabia.

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