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Why Oil Prices Are Falling


Wayne Curtis   Consumers are getting some badly-needed relief at the gas pumps.  Prices have dropped precipitously in recent weeks.  As this is written, the average price for unleaded gasoline in Alabama is $2.75 per gallon.
The primary reason for cheaper gasoline is plunging oil prices.  At present, crude oil is selling around $77 per barrel, down about 27 percent from June, when the price was $105 per barrel.
Perhaps many readers are wondering why crude oil prices have plummeted.  The answer involves the two old but inescapable economic concepts of supply and demand.
Let’s look at demand first.  World demand for oil has fallen dramatically because of weak global economies, particularly in Europe, where growth has stagnated.
To understand this, one has only to look at economic indicators in the euro area, also known as the eurozone.  Average unemployment is 11.5 percent, with above average rates in Greece (26.4 percent) and Italy (12.5 percent).  GDP has grown a miniscule 0.8 percent in 2014 and is negative (-0.2 percent) for the year in Italy.
The supply side may be even more powerful than shrinking worldwide demand.  This results from the explosion of energy production in the United States.  In the last few years, this nation has become an energy superpower.  Since 2008, we have increased domestic supply by 50 percent.
This avalanche of production results from shale oil and gas production made possible by technological breakthroughs such as hydraulic fracturing (fracking) and horizontal drilling.  As this has occurred, the United States has become the world’s largest producer of natural gas.
Oil production has doubled in just six years.  This comes primarily from new shale fields that have been discovered in Texas and North Dakota.  Geologists estimate they could contain hundreds of years of oil and gas supplies.
The burst of energy output has created an oversupply of oil and natural gas, creating a world-wide surplus. And this has forced prices down.  While this is a fortunate circumstance for consumers, it poses a potential problem for some oil producing nations, especially OPEC.
How low will oil prices go?  No one can answer this question with a degree of certainty.  But, in general, prices will remain low as long as the European economy flounders and the U.S. continues high levels of energy production.
Wayne Curtis, former superintendent of Alabama banks, is a retired Troy University business school dean.