By Wayne Curtis
Oil prices have collapsed in recent months. One year ago, the price of Brent crude, the primary international benchmark, traded at $60 per barrel. As this is written, the price is hovering at $29 per barrel.
What has caused the sharp contraction? The answer is rooted in the basic economic concepts of supply and demand. This brings to bring to mind the often-quoted writing of the famous British economist John Maynard Keynes, “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
Crude supply worldwide has increased dramatically. Production in the United States has almost doubled in recent years. As this occurred, oil exports from countries such as Saudi Arabia, Algeria, and Nigeria must compete for new markets.
In addition, Canadian and Iraqi exports are climbing. And despite its economic problems, Russia is continuing to pump oil. Excess supply of oil causes prices to drop, and this translates into lower prices for products, such as gasoline and diesel, that are derived from crude oil.
Demand, on the other hand, is relatively weak. The economies of most of the world are weak and struggling. Moreover, automobiles and other vehicles are becoming more fuel-efficient.
Steep declines in crude prices are both beneficial and detrimental. The primary beneficiaries are consumers. Motorists, especially low-income individuals who spend a greater proportion of their income on gasoline, are benefitting from lower gas prices. Nationally, the average price of regular unleaded gasoline is down from $2.03 per gallon one year ago to $1.90 per gallon today. In like manner, diesel, heating oil, and natural gas prices have declined.
As crude prices have dropped, the major losers are the oil-producing states and foreign countries. Alaska, Louisiana, North Dakota, Oklahoma, and Texas are facing financial challenges. Nations such as Brazil, Ecuador, Iran, Russia, and Venezuela are experiencing economic and possible political volatility.
Oil companies are also feeling pressure. While major producers are slashing payrolls and laying off employees, smaller firms, particularly independents, are in imminent peril. Many are being forced to sell assets to stay afloat.
A final category of losers is investors, especially those who have oil and oil-related stocks in their retirement plans. Not only have prices of these stocks fallen precipitously, but many have cut dividends.
Don’t expect a return to normal anytime soon!
Wayne Curtis, former superintendent of Alabama banks, is a retired Troy University business school dean. Email him at email@example.com.