Remember when, a few short months ago, the whole planet was panicked about cripplingly high oil prices? That’s changed in a hurry. Crude prices are now plummeting. Oil in London is trading for $96 per barrel, way down from $126 back in February.
The big reason why: supply and demand. The world is pumping out more oil and other liquid fuels right at the moment when the global economy is starting to slacken and people are using less of the stuff. Matthew Phillips of BloombergBusinessweek offers up this great chart:
So where did this extra oil* come from? Some of it was tapped from new unconventional supplies in the United States and Canada. But OPEC countries have also been cranking up crude production in the past year. Iraq is slowly rebuilding its oil industry. And Saudi Arabia has added about 1 million barrels per day in the past year, to the point where it’s now pumping out more oil than it has in the past three decades.
Meanwhile, global demand as falling. As my colleague Steve Mufson reports, according to Barclays Capital, most of the growth in global oil demand in recent years has been coming from just four countries: Saudi Arabia, China, India, and Brazil. And those last three countries are all slumping. That means there are fewer takers for that extra oil than was expected.
Add that up, and many analysts are now predicting that crude prices will keep falling this year — possibly as low as $90 per barrel. From a historical point of view, that’s still very high. But from the perspective of the U.S. economy, that could provide a small stimulus as gasoline prices keep falling. According to recent estimates by Macroeconomic Advisers, a $10 drop in the price of oil could boost U.S. gross domestic product by 0.2 percentage points.
One caveat, though: It’s still entirely possible that oil prices won’t keep falling. Stuart Staniford notes that Saudi Arabia could decide to cut production in the near future. Remember, most OPEC countries need relatively high oil prices to pay for the domestic spending programs they’ve recently put in place to placate protestors. And there’s always the possibility of a surprise plot twist. Negotiations with Iran could break down. Or Europe could suddenly fix its problems
But that’s just another way of saying that we’ve reached an era in which oil prices are extremely volatile — and difficult to predict. Which is why Kevin Drum wonders if the United States would be better off with some sort of variable tax on oil that kept prices at a steady (but fairly high) price. That would allow the country to slowly but steadily reduce its reliance on crude, rather than lurching from panic to complacency and back to panic every time there’s a sudden kink in the world oil markets.
* By the way, that chart actually shows “liquid fuels” production, which includes crude oil, natural gas liquids like propane, and ethanol. See here for a fuller breakdown. And note that while the most important liquid fuel, crude oil, recently hit new highs, it’s also largely stagnated since 2005 — so the chart is still consistent with various peak-oil worries.