As anyone who drives a lot–or has a TV, reads the paper, or just generally pays attention–knows, the price of gas has gone down recently. Way down! More specifically the price of Brent crude oil, a major global type, dipped below $60 a barrel Tuesday for the first time in more than five years. That means the price of crude oil has dropped by more than $50 a barrel since its peak, which was just in June. Additionally, nationwide the average price of a gallon of gas has dropped from a high of $3.70 in April 2014 to the current low of $2.53. There are several reasons for this drop; there are also numerous issues that have already begun to arise from the drop in price and many more potential problems if the price of oil remains low or falls even further.

Why is the Price of Oil Falling?

First, the obvious questions: why are oil prices suddenly dropping and why is it happening so rapidly? To answer these queries one must look into account, supply, and demand.

Too Much Supply

First is supply. Specifically, there is too much oil out there, or at least that’s the perception. This buildup is the result of several actors overproducing when the market is not ready to absorb their goods.

• OPEC: OPEC stands for the Organization of the Petroleum Exporting Countries. OPEC is an intergovernmental organization aimed at fixing oil prices of its member countries to ensure each has a fair and stable market for its product. The organization is made up of countries from South America, North Africa, and the Middle East. OPEC gained its greatest notoriety, and also put its fairness into question, with two embargoes in the 1970s that dramatically increased prices at the time. In a surprising about face however, in late November 2014, members elected to continue production at current levels. Why would OPEC elect to continue producing at high rates when basic economic wisdom called for a smaller supply? First, several members of OPEC have only just recently been able to ramp production back up to earlier levels. Libya, for example, was in a long struggle with rebels before it recently was able to reopen two key ports critical for oil exportation. Saudi Arabia was already burned before by trying to reduce supply to match demand back in the 1980s. Instead of keeping prices high it saw a significant loss in market share.
• U.S. Energy Boom: OPEC members increasingly have to tangle with the United States. While reports vary on which country is ranked where, the United States is unquestionably the world leader in energy production when natural gas and bio-fuels are included along with oil manufacturing. Biofuels and natural gas aside, the United States still ranks second in oil production behind Saudi Arabia, it being responsible for approximately 12 percent of the world’s output. The reason for the spike in American production is the now well documented shale boom that transformed places like North Dakota into energy and job hot spots. The video below details some of the pros and cons of the U.S. oil boom.

• Other Players: Along with OPEC and the United States there are several other major players in the Oil Industry. Chief among them is Russia, which sits closely behind at number three on the world’s production list. Russia is incredibly dependent on its energy sector, which generates up to 50 percent of the funds necessary to underwrite its budget. Along with Russia there are a few other non-OPEC countries, namely China, Canada, Brazil and Mexico.

Less Demand

Clearly then, higher supply is impacting world oil prices, but it is not alone. Equally as important is demand. After all, you can make as much of something as you like, but if no one wants it you are never going to make any money. So it is, in a sense, with oil.

A major decline in demand has occurred in two generally reliable regions–Asia and Europe–but specifically in Germany and China, due to economic slowdowns. In other key places such as the United States, similar sags in demand have been seen, but for different reasons. In the U.S., use of gasoline by companies plummeted following the financial crisis and has never returned to pre-crisis levels. Additionally, after numerous experiences being burned by unstable prices America has shifted away from high gas consumption toward more efficient technology like hybrids.

What It Means Now

Bad News

So what does this all mean then? For some countries this drop in oil prices is very bad. Russia in particular has a lot to lose with plunging oil prices. As alluded to earlier, up to 50 percent of its economy is dependent on oil prices and those prices have plummeted. As a result, Russia’s currency–the Ruble–has recently collapsed, losing a massive amount of value in just a couple of days. The collapse, coupled with western sanctions over Ukraine, is threatening to send Russia into a recession. The big question then is whether Russians are still willing to support Putin’s tactics when their standard of living starts to decline?

Other countries such as some of the members of OPEC also have a lot to lose as a result of the crisis. Like Russia, much of their budgets are predicated on their oil revenue. Thus countries like Iran and Nigeria that had relied on oil prices at much higher rates to maintain a sound budget now find themselves being forced to make cuts or face deficits–and even potentially defaults. It is even worse for another member: Venezuela.

Venezuela, despite having huge oil reserves, is facing an impending crisis that could be even worse than Russia’s. At least in Russia’s case it has reserve currency and little debt. Venezuela on the other hand has neither and was already dealing with shortages of other goods earlier this year. This situation has the makings of a powder keg. Some of these countries may also have to consider giving up stipends or canceling social programs funded by oil production. Some of these programs were instrumental in countries like Saudi Arabia potentially avoiding Arab Spring-style uprisings. The video below touches on the problems dropping oil prices imposes on Russia and Venezuela.

Mixed News

What about the United States? As mentioned earlier it has recently become either the biggest or second biggest producer of oil itself. What would a prolonged drop in the price of oil mean to the stars and stripes? Well, as is often the case, the United States may provide the most difficult answer. In certain ways this is a good thing. For example, Americans spending less on gas have more money to spend on other consumer goods, which could help spur faster economic growth.

Conversely, lowered prices could also mean some firms could no longer compete in the market. Many have speculated that lowered prices could dampen the U.S. oil boom currently taking place. In fact in has been widely circulated that OPEC’s decision to keep production high is basically a stare down between it and the United States where one side will eventually be forced to lower production to artificially inflate prices to stay in business. Additionally, employment is a major concern. Lost jobs here could be especially painful as they account for many of the jobs created since the recession.

 Conclusion

At the end of the day it is still unclear what will be the long term results of the drop in oil prices. In fact, as of right now it is still unclear how long these drops will be maintained at all; however, as the price continues to plunge and producers continue to forge ahead it seems fair to at least speculate. Really it’s just amazing that after all the war and talk of renewables globally that the world finds itself on such a precipice again concerning the familiar black gold. It seems then for now the impact of oil’s price drop will be left, much like its value is calculated, up to speculation.

Resources

Primary 

Organization of the Petroleum Exporting Countries: Brief History

Additional

Finances Online: Top 10 Oil Producing Countries in the World: Where’s the Greatest Petroleum Domination

USA Today: Eight Countries that Win and Lose Big from Oil Plunge

Vox: Why Oil Prices Keep Falling and Throwing the World Into Turmoil

USA Today: Russia’s Ruble in Free Fall Amid Panic

CNBC: Ticking Time Bombs: Where Oil’s Fall is Dangerous

Sovereign Investor The Hidden Cost of Oil

Foreign Policy: Can OPEC Kill the US Oil Boom?

Forbes: Oil & Gas Boom 2014: Jobs, Economic Growth and Security

CNN: Oil Plunge Takes Prices Below $55 A Barrel

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

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Earlier this year, the Environmental Protection Agency (EPA) released new guidelines for what gasoline can contain. The motive behind the new regulations was to create gasoline that minimizes the effects on the environment, improve public health, and mitigates the effects of climate change. One big change was that the EPA announced its desire to minimize the amount of sulfur in gasoline. Read on to learn about the effects of sulfur in gasoline, the debate, and the end results.

Why do we care about sulfur in our gasoline?

Sulfur is a smog-forming pollutant that has been linked to respiratory diseases and air pollution. The new regulations would require refiners to reduce the amount of sulfur in gasoline by 60 percent by 2017, from 30 parts per million to 10 parts per million. President Obama asked the EPA for cleaner gasoline standards in 2010, and since then the EPA has worked with scientists and automakers to develop these new regulations. However, the regulations would require oil refiners to install expensive new equipment in their refineries and would force auto manufacturers to install new pollution-control in car engines. While some argue that these new regulations will improve health at a minimal cost, oil refiners argue that the costs are unnecessarily expensive to their industry, thus hurting consumers, taking away jobs, and negatively impacting the economy as a whole.

What are the arguments for these new guidelines?

Advocates argue that the additional costs of the EPA regulations would pay for themselves by the year 2030 through decreased costs in health care. The EPA estimates that the reduction in sulfur emissions would save Americans between $5.7 and $19 billion by the year 2030 and would reduce the amount of sick days taken at school and work. The EPA also estimated that Americans could see the prevention of 770-2,000 premature deaths, 2,200 hospital admissions, 1,900 asthma attacks, and 30,000 reported cases of respiratory problems in children living near highways or urban centers. All of these health benefits, the EPA claims, would come at an increase of just 2/3 of a cent per gallon and the addition of just $75 to the sticker price of a new car.

Representative John Dingell (D-MI) explained the benefit behind the new law, stating,

We do have a serious problem with too much sulfur in gasoline. It screws up the mufflers, it screws up the catalytic converters, and it screws up a lot of other things, too.

Other advocates point to the emission standards of the European Union, Japan, and South Korea, which are far ahead of those in the United States, to argue that these regulations would bring the US up to speed with other developed countries. Lastly, some in the auto industry have argued that these sulfur emission standards would be beneficial to auto makers in enabling them to meet newer, stricter federal environmental regulations, which would more than make up for the additional cost of rigging their cars to emit less sulfur.

What are the arguments against the new guidelines?

Opponents argue that the EPA regulations would have minimal environmental impact while putting greater strain on the economy and ultimately hurting consumers. Since 2000, oil refiners have already been required to reduce the sulfur levels in gasoline by 90 percent; the new regulations would mandate the removal of the last 10 percent, which according to experts is much more difficult and costly to remove than the initial 90 percent. This process would cost the oil industry roughly $10 billion and would increase the cost of gas by nine cents per gallon. This increased cost would force the oil companies to cut employment and raise prices, which in the end hurts the average consumer. Additionally, opponents argue that these increased costs are unnecessary because they will have little impact on climate change and global warming. While sulfur emissions contribute to smog and some air pollution, there has been no link found between sulfur emissions and the factors that contribute to climate change, leading opponents to argue that the environmental impact of these regulations is just not worth the economic stress forced upon consumers and job seekers.

The American Petroleum Institute (API) disagreed with the new guidelines, complaining especially about the little time that producers will have to comply with the guidelines. The API’s Bob Greco claimed that the rules don’t allow enough flexibility for producers to switch over in both a timely and safe manner. Patrick Kelly, an API Senior Policy advisor, also said:

API opposes this discretionary rulemaking as we have serious doubts as to the Agency’s justification for it. We have been insisting that EPA demonstrate a scientific justification for two and a half years. API commissioned research on the costs and benefits associated with further reductions in gasoline sulfur. We found some clear conclusions: The proposed standard will yield little immediate or longer term air quality benefits. And, reducing average sulfur from 30 parts per million to 10 parts per million will impose enormous costs. Further reducing gasoline sulfur is not necessary for meeting more stringent vehicle emissions standards, and automakers are unlikely to introduce vehicle emission technology that is enabled by the lower sulfur fuel.

Conclusion

The implementation by the EPA of new guidelines regarding sulfur in gasoline made news this spring. As the guidelines continue to be phased into place, there is still disagreement about the viability and fairness of the rules, and whether or not they will have a concrete effect on our environment, health, and economy remains to be seen.

Resources

Climate Progress: A Comprehensive Guide to the EPA’s New Pollution-Reducing Gasoline Rules

Huffington Post: Sulfur, Sulfur, Toil and Trouble

TIME: EPA’s New Emission Rules Could Increase Gas Prices, Save Lives

Earth Day Network: EPA Finalizes Tier 3 Gasoline Standards

Environmental Protection: API Opposes EPA’s Tier 3 Rule

Bloomberg: Refiners Rebuff EPA Concessions In Rule to Cut Sulfur

Machinery Lubrication: New EPA Gasoline Regulations Costly, Counterproductive

Bloomberg: EPA Said Poised to Issue Lower Sulfur Limits On Fuel

The New York Times: EPA Set to Reveal Tough New Sulfur Emissions Rule

Utah Political Capitol: Tier 3 Gasoline: Air-Pollution Slayer or Tail Pipe Dream?

Convenience Store and Fuel News: EPA Finalizes Tier 3 Emission & Fuel Standards

Union of Concerned Scientists: The EPA’s Tier 3 Standards

Joseph Palmisano

Joseph Palmisano is a graduate of The College of New Jersey with a degree in History and Education. He has a background in historical preservation, public education, freelance writing, and business. While currently employed as an insurance underwriter, he maintains an interest in environmental and educational reform. Contact Joseph at staff@LawStreetMedia.com.

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