Supply and demand.
Global demand for oil has fallen, but more importantly supply is overwhelming demand. It is not often that we are faced with this problem, to this extreme. In the past this has been caused by the consumer going into hibernation. When gas prices are in excess of $4 we often slow our consumption of everything including oil. This caused oil prices to drop tremendously in 2008. Well, that does not appear to be the case this time; with gas prices averaging $2.68, and below $2 in some states, demand has remained, however supply has expanded.
A few things to consider:
OPEC
Recently the Organization of Petroleum Exporting Countries (OPEC) decided to leave production unchanged. They also reported demand expectations for 2015 to be a million barrels a day lower than current production levels supplied by OPEC. If their supply out paces demand than global supply should far outpace demand.
IEA
The International Energy Agency reported 2015 demand would fall from current levels; which would heighten the blow of increased supply.
Russia
The Russian economy is drastically dependent on oil production. Given current sanctions from the west, the falling ruble, and recessionary environment, Russia is selling all the oil it can produce to generate revenue. While understandable, they are contributing to the flooded supply and consequent price drop; which in all actuality hurts them.
US Energy Department
Last week the US Energy Department indicated that crude supplies increased more than expected. The U.S. has been producing more oil in an effort to decrease its dependence on foreign oil. As a large consumer of oil, our attempt to reduce dependence also floods the market with large quantities of additional supply.
Libya
While not the largest supplier of oil, Libya’s production has been shut down for a long stint as they were battling geopolitical issues. Now back in production they add to the global supply issues as well.
All things considered the conditions that have led to over-supply and the stance of each of the players are understandable. All of the countries involved have good reason for not wanting to be the nation or organization to curb production. This in effect would be helping everyone else’s profit line at the expense of their own. In the long run a co-operative decision to reduce production across all major players would benefit all, but is unlikely to be agreed upon.
The impact that falling oil prices will have on inflation for the global economy and its ability to continue to expand is the bigger question. The price issues we are seeing today take time to impact the market and also take time to translate into economic reports. The true impact of current price conditions most likely will not be seen in economic reports until January or even February in some cases.
China took action last week, initiating additional cash stimulus. The U.S. has just completed its quantitative easing program, but should global inflation issues hit home, that could change. Europe has decided to delay any further action until January. It is likely that its delayed response to current conditions could end up costing additional €.
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