The plummeting price of oil is still the biggest energy story in the world right now. It’s bringing back cheap gasoline to the United States while wreaking havoc on oil-producing countries like Russia and Venezuela.
Why does the price of oil keep falling? The short version of the story goes like this: For much of the past decade, oil prices were high — bouncing around $100 per barrel since 2010 — because of soaring oil consumption in countries like China and conflicts in key oil nations like Iraq. Oil production couldn’t keep up with demand, so prices spiked.
But beneath the surface, many of those dynamics were rapidly shifting. High prices spurred companies in the US and Canada to start drilling for new, hard-to-extract crude in North Dakota’s shale formations and Alberta’s oil sands. At the same time, demand for oil in places like Europe, Asia, and the US began tapering off, thanks to weakening economies and new efficiency measures. On top of that, countries like Iraq began producing more oil.
By late 2014, world oil supply was on track to rise much higher than actual demand.
As prices slid, many observers waited to see whether OPEC, the world’s largest oil cartel, would cut back on its production to prop prices up. (Many OPEC states, like Saudi Arabia and Iran, need high prices to balance their budgets.) But at its big meeting in November, OPEC did nothing. Saudi Arabia didn’t want to give up market share, and it hoped that lower prices would help throttle the US oil boom. That was a surprise. So oil went into free-fall.
The oil price crash is now upending the global economy, with ramifications for every country in the world. Low prices are excellent news for oil consumers in places like Japan or the US, where gasoline is the cheapest it’s been in years. But it’s a different story for nations reliant on oil sales. Russia’s economy is facing a potential meltdown. Venezuela is facing serious unrest. Even better-prepared countries like Saudi Arabia could face heavy pressure if oil prices stay low.
And today, another ramification. The price of oil, traditionally around $100 per barrel before the freefall, dipped below $50 per barrel today, and there is no end in sight. Some experts say it can go as low as $30 per barrel in the weeks to come. As a result, the Dow dropped more than 300 points just after midday.
“We’re starting a new year with a bit of trepidation; it’s difficult for equities to get any traction when one of the asset classes is in a free fall,” said Art Hogan, chief market strategist at Wunderlich Securities, referring to crude’s ongoing decline. Exxon Mobil, Chevron and other oil producers fell with the price of crude.
“Clearly we haven’t found a bottom in the commodity,” said Hogan of oil’s ongoing decline.
On the New York Mercantile Exchange, U.S. light crude, also known as West Texas Intermediate, fell 4.7 percent, with futures for February delivery falling as low as $49.95, and lately down $2.49 at $50.20 a barrel.
Just after midday, the Dow Jones Industrial Average shed 312.97 points, or 1.8 percent, to 17,520.02, with Chevron leading blue-chip declines that included 28 of its 30 components. The S&P 500 declined 36.16 points, or 1.8 percent, to 2,022.04. The Nasdaq dropped 62.02 points, or 1.3 percent, to 4,664.81.