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Low Oil Prices: Causes and Effect

The oil industry is characterized with booms and busts. However, it has witnessed the lowest oil prices for more than a decade. Oil prices have fallen rapidly which can be attributed to supply exceeding demand. However, some critics argue that it is a scheme by the US government and Saudi Arabia to punish the Russian government and to prevent the rise of Iran.

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The slow economic growth in the main emerging markets has reduced the demand for oil and gas significantly. For instance, the demand for oil in the United States has reduced drastically due to increased domestic production (Wijst, 2013, p. 314). In the global market, the supply of oil has increased significantly over the last ten years which has caused oil prices to drop. Today, oil supply in the market is more than twice the demand. The lifting of sanction on Iran has also added more oil in the market. In fact, it is estimated that the current supply is 2.6 times the level of demand (Baumeister & Kilian, 2016, p. 142).

The abnormal supply in the market has pushed oil prices to its lowest this year at $30 per barrel. Although the current supply in the market is high, oil-producing countries are not willing to reduce production (Reyes, 2015, p. 127). For instance, in 2015, Saudi Arabia the biggest oil producer maintained it would not reduce oil production. Moreover, other oil producing countries such as Canada, Iraqi and Russia have decided to increase the level of oil production.

International politics also plays a critical role in determining oil prices. Since Saudi Arabia is the largest producer of oil in the world, it has oversupplied the market with oil in order to eliminate its political rivals such as Russia and Iran. Over the past decade, the relationship between Saudi Arabia and Iran has been strained due to enmity between the two states. Today, both countries are supporting opposite sides in the Syrian war. Saudi Arabia believes that by oversupplying the market with oil, the market prices will drop which will affect the growth potential of Iran and Russia.

Saudi Arabia intends to prevent the Russian government, which heavily relies on oil revenues from fighting in Syria. Saudi Arabia supports the Syrian rebels while Russia and Iran support the Syria government (Lucas, 2014, para. 3). Saudi believes low oil prices will prevent Russia from helping President Assad. However, this goal might not be achieved because the Russian will not pull out of Syria soon. The Syria war has played a vital role in determining oil prices because Syria is the key to success of both Russia and Saudi Arabia.

The present situation in Syria is related to a gas and oil pipeline into Europe. Saudi Arabia and the other Gulf States intended to supply Europe with gas and oil through a pipeline that would pass in Syria. However, the Syrian government led by Assad rejected their plan in order to protect the interest of Russia in Europe. In order to punish Russia for supporting Assad, Saudi Arabia and other Gulf states decided to lower oil prices by oversupplying the market. They believed Russia would come back to its senses and stop supporting Assad. However, Putin is still supporting the Syria government.

Low oil prices have negatively affected the oil industry in Montana. However, it has spurred economic growth in other sectors of the economy. Oil and gas prices have dropped significantly in Montana with gas prices going as low as $2 per gallon. Many companies have stopped producing oil because it is expensive to produce locally than to import.

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Low oil prices have negatively affected the oil industry causing many people to lose their job, especially in eastern part of Dakota. Low oil prices have also affected the economy of Alberta, Canada. Since Alberta relies heavily on oil for economic growth, low oil prices are pushing down employment as well as economic development. Low oil prices have also reduced economic development in the construction sector, which is expected to witness a significant number of workers lose their jobs (Scott, 2016)

Low oil prices have caused many people to lose their jobs. In some cases, it is used as a weapon. For instance, last year gas in Michigan was being sold at 46 cents as a strategy to eliminate competitors. The same applies to the global oil market where some countries want to eliminate their competitors. Oil price is used as a geopolitical weapon by Saudi Arabia and the US.

Luke believes that Saudi Arabia lowered the global oil prices in order to eliminate other oil producing countries out of the market. Just like in Michigan, Saudi believes low oil prices will eliminate its rivals in the market. However, low oil prices have an adverse impact on Russia and Venezuela. Low oil prices have caused a deep recession in some countries such as Russian and Venezuela. Moreover, it has caused the level of inflation to increase in Iran and Russia (Luke, 2016).

Bank believes that low oil prices are propping up economic development in Asian economies (p. 17). Low oil prices have helped to lower the rate of inflation in many Asian countries. For instance, it has stimulated Japanese economic growth by allowing banks to lower interest rates. Major economic developments have been witnessed in oil importing countries. It has enabled governments to institute reforms that will spur economic growth over the long term. It has also helped oil-importing countries in Asia to subsidize their energy sectors in order to make them more productive and cost efficient. Low oil prices have enabled Japan to increase its economic development which will cause an increase in gross domestic product (Bank, 2015).

In summary, oil prices have dropped significantly because supply has exceeded demand. It has been caused by price wars between the Gulf States, Iran and Russia. Low oil prices have caused economic slowdown in oil producing countries. Consequently, many people have lost their job opportunities. Moreover, it has lowered economic development in oil producing countries. However, it has spurred economic development in Asia because many countries have reduced the amount of expenditure on imported oil which is now being used for economic development.

References

Bank, A. (2015). Asian Development Outlook 2015 Financing Asia’s Future Growth. Manila: Asian Development Bank.

Baumeister, C., & Kilian, L. (2016). Forty years of oil price fluctuations: Why the price of oil may still surprise us. Journal Of Economic Perspectives, 30(1), 139-160.

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Lucas, E. (2014). How oil’s become the world’s most potent weapon.

Luke, R. (Producer). (2016). The real reason oil is so cheap and how Rockefeller and Rothschild are involved [Audio podcast].

Reyes, J. (2015). Latin American Economic Development. City: Taylor and Francis.

Scott, T. (2016). Cause and effect of slumping oil prices: Sustained drop in oil prices hurts and helps Montana’s economy – Flathead Beacon. Flathead Beacon.

Wijst. (2013). Finance: a quantitative introduction. Cambridge: Cambridge University Press.

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StudyCorgi. (2020, December 5). Low Oil Prices: Causes and Effect. Retrieved from https://studycorgi.com/low-oil-prices-causes-and-effect/

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1. StudyCorgi. "Low Oil Prices: Causes and Effect." December 5, 2020. https://studycorgi.com/low-oil-prices-causes-and-effect/.


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StudyCorgi. "Low Oil Prices: Causes and Effect." December 5, 2020. https://studycorgi.com/low-oil-prices-causes-and-effect/.

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StudyCorgi. 2020. "Low Oil Prices: Causes and Effect." December 5, 2020. https://studycorgi.com/low-oil-prices-causes-and-effect/.

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StudyCorgi. (2020) 'Low Oil Prices: Causes and Effect'. 5 December.

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