The Organization of Petroleum Exporting Countries (OPEC) recently met in Vienna to discuss an official output quota. By the end of the meeting, however, the member countries did not agree on a quota and oil production remains near record levels. While this may not seem like breaking news, the group’s decision will have major ramifications far beyond its members. That is because this decision comes at a time when the price of oil is falling to lows not seen since the Great Recession. It is also coming at a time when a massive over-supply of oil exists in the market.

Read on to learn more about OPEC’s decision based on its past and future plans. Why does the group refuse to turn off the pumps when the wealth of supply seems to be hurting the bottom line?

History of OPEC

OPEC was founded in 1960 by its five original members: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Since then, nine members joined the group: Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, Angola, and Gabon. The organization’s stated objective is to “co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers,” but the group has historically faced criticism for trying to control the price of oil for political and economic reasons. OPEC’s members meet regularly to agree upon oil production quotas, which in turn influence the price of oil internationally.

While many have a negative perception of OPEC, the organization’s roots were generally good-intentioned. The group formed shortly after many oil producing countries emerged after colonial empires were split up. Its inception, in part, explains OPEC’s desire to set a price as a means to control and benefit from its member nations’ natural wealth.

Criticism of the group peaked in the 1970s after two high-profile events: namely, its 1973 embargo on oil exports to the United States and the fallout from the 1979 Iranian Revolution. Oil prices eventually dropped dramatically in the 1980s only stabilizing in the 1990s. This happened because of a variety of factors including a burgeoning interest in the environmental impact of oil. Oil experienced another boom in the late 90s through to the mid-2000s. However, it once again experienced a sharp decrease as a result of the 2008 Global Recession.

Following the recession, oil prices started rising, reaching a peak in 2014. Since the middle of last year, the price of oil has dropped precipitously, causing a flurry of responses from countries that are dependent on the oil industry for survival. The video below provides a detailed history of OPEC:

What is OPEC up to?

The most recent drop in oil prices brings us to where we are now. On December 7, oil prices hit their lowest levels in seven years. In fact, since June 2014 when the price of oil peaked at $108 per barrel, the price of oil has lost two-thirds of its value. The underlying driver behind the recent price drop is primarily an over-supply of oil. One explanation for the drop is the American shale boom, which significantly increased oil production in the United States. Another is the decision by OPEC not to cut its production but to keep it at near record output levels.

If a good’s supply increases but demand stays the same or decreases then its price will go down. The overall goal then is to find the equilibrium somewhere in the middle, where sellers can offer their goods at a price they feel is reasonable and at which consumers are willing to pay. OPEC’s recent decision to continue to keep production levels high has contributed to the massive drop in the global price of oil. Doing so challenges OPEC members’ ability to cover their expenses and profit off of high prices.

The question then is why? The simple answer is market share and scale of production. Saudi Arabia, a major player in OPEC, is willing to take a loss on oil in the short-term in an effort to disadvantage its competitors. The relatively long period of high oil prices that occurred over the past few years made new, more expensive means of getting oil profitable. This led to a rise in oil extraction methods like deep-water drilling and shale oil production (including fracking) in the United States. This method of getting oil is notably difficult and expensive, but with high oil prices, companies were able to spend more to extract oil because they could still turn a profit. Now that the price of oil has fallen dramatically, such efforts are becoming too expensive and shale oil production has gone down. If the price of oil stays low for a long period of time this could significantly hurt the shale industry helping OPEC countries like Saudi Arabia in the long run. This would play into the Saudis’ long-term goal of gaining back its market share, once the playing field has been thinned. But while a decrease in U.S. production has already started to happen oil prices have not yet gone back up, putting oil producers in a tricky place. The accompanying video gives a look at OPEC’s actions:

In the meantime, Saudi Arabia and the rest of OPEC also have to contend with other established nations in the oil industry, namely Russia. While the Saudis have started to make their way into traditional Russian oil markets, Russia has fired back by temporarily becoming the largest supplier to Asia, an area typically dominated by OPEC.  The struggle between these two has also added to the oversupply in the market, as neither wants to concede its customers.

Further Trouble Ahead

OPEC’s strategy is decidedly risky for reasons beyond temporary loss in revenue due to lower prices. First, there’s the return of Iran to the forefront of the global oil market. Iran is currently under sanctions and its oil exports are limited to roughly 1.1 million barrels a day–about half of its peak production in 2012.  However, international sanctions on Iran are now going away in light of the Iran nuclear deal, and the country plans to produce 500,000 more barrels a day with the ultimate goal of reclaiming its market share–as Saudi Arabia and Russia are doing–no matter the cost.

Second, demand for oil could also start contracting next year, as some analysts think demand could shrink by up to as much as one-third. While drivers typically do more driving when oil is cheaper, the economic slowdown in Asia, particularly in China, threatens to cause an even larger over-supply of oil on the world market. But foreseeing changes in demand can be particularly difficult. Other analysts argue that the recent changes in China could lead to even greater demand for oil as the country shifts to a more consumer-driven economy.

Ramifications

OPEC

The concerns listed are less true for Saudi Arabia, OPEC’s de facto leader, which the IMF estimates can last about five years with oil prices at current levels before it needs to make significant changes to its budget. The Middle Eastern countries in the worst shape, however, are Iran and Iraq. While Iran’s refining costs are not particularly high relative to other countries, its economy suffered a significant blow from international sanctions. Its neighbor, Iraq, is in even worse shape, facing not only mounting debt but also the specter of ISIS operating and controlling a large swath of its territory. Forgone revenue from unusually low prices could start to hurt oil-exporting countries without large cash reserves.

The consequences of low oil prices could be just as bad, if not worse, for members of OPEC outside of the Middle East. Countries such as Ecuador, Venezuela, Nigeria, and Algeria are extremely reliant on oil for government revenue, often for the majority of their budgets. Low prices have already sparked fear of unrest in areas such as Nigeria and Venezuela, which like Saudi Arabia use oil revenue to maintain social and economic stability. In Ecuador, these fears have already been realized–thousands have gone to the streets to protest government cost-cutting as a result of the falling price.

Russia

Outside of OPEC, perhaps no country is feeling the effects of the declining value of oil as much as Russia. Like many of the OPEC nations, it is very dependent on oil for income. In fact, oil and gas make up roughly two-thirds of Russian exports and half of all government revenue. With prices dropping so low, the nation has subsequently felt the effects–Russia’s economy will contract by about 3.8 percent this year and is expected to shrink further in 2016.

United States

Unlike Russia and the OPEC nations, the United States is not particularly dependent on oil production for government revenue, but the drop in prices will have some impact. If OPEC and Saudi Arabia hope to keep prices low to eliminate American competitors, evidence suggests that may be working. The number of oil rigs in the United States has fallen slightly and domestic production has decreased. In fact, for some U.S. states that rely on the oil industry for jobs and revenue, like Texas, Alaska, North Dakota, Oklahoma, and Louisiana, falling prices can pose a notable economic challenge.

However, the price plunge is certainly not all bad news for Americans. The average price of gasoline per gallon is now considerably lower than this time last year. Additionally, according to the United States Energy Information Administration, the average household is also likely to save $750 on gas this year. These savings are especially helpful for lower-income people who spend more of their income on gas and heating. Similar savings will likely occur in many European countries as well. The following video looks at some of the effects of low oil prices:

Conclusion

The members of OPEC, particularly Saudi Arabia, are taking a notable gamble with their decision to keep oil production high despite low prices. If oil-exporters reduce their production they could lose their market share, but if oil prices remain low they could face fiscal crises and possibly unrest. Yet the decision could pay off in the long run as more expensive forms of oil production slow down and prices go back up.

While OPEC is notably pumping too much oil, an issue that will likely become worse when Iran increases its exports, nearly all oil producing countries find themselves in a race to the bottom. Oil producing countries are already experiencing the consequences of low prices, but that will likely worsen if the status-quo continues. Meanwhile, the United States and most oil-importing Western nations stand to benefit.

Resources

CNN: OPEC is at War and it’s Sending Shockwaves Around the World

OPEC: Brief History

CNN: Oil prices dive below $37 to Lowest Level in Seven Years

Library of Economics and Liberty: Supply

Bloomberg View: Saudi Arabia’s Oil War with Russia

U.S. News and World Report: Iran to Add 500,000 Barrels of Oil Exports After Sanctions are Lifted Through Nuclear Deal

The Wall Street Journal: Global Demand Growth for Oil May Fall by a Third in 2016

CNN Money: Saudi Arabia to Run Out of Money in Less Than 5 Years

New York Times: From Venezuela to Iraq to Russia, Oil Price Drops Raise Fears of Unrest

Reuters: Russian Government Sees 2015 GDP Down 3 percent, More Optimistic Than Other Forecasts

International Business Times: Oil Price 2015 Russia Forced to Make Additional Spending Cuts, Official Says

Guardian: OPEC Bid to Kill off U.S. Shale Sends Oil Price Down to 2009 Low

New York Times: Oil Prices What’s Behind the Drop? Simple Economics

The Christian Science Monitor: Can Canada’s Oil Sands Survive Low Oil Prices?

U.S. News and World Report: Energy Stock Winners and Losers When U.S. Oil Exports Go Global

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.

The post An Over-Supply of Underpriced Oil: Explaining the New Energy Crisis appeared first on Law Street.

Since November 2014 when Republicans won control of the Senate and maintained control of the House, there have been promises that many hot topics will get attention. One of the first on the list was the issue of the Keystone XL Pipeline. While the political status of the bill is still up in the air, read on to learn about what the Keystone XL Pipeline is, and the political arguments for and against it.

What is the Keystone XL Pipeline?

The Keystone XL Pipeline is a pipeline transport that is to start in the town of Hardisty in Eastern Alberta, Canada and extend southeast to Steele City, Nebraska. The goal of the pipeline is to help transport crude oil from Canada to the Gulf Coast in Texas, and to help move oil from the Bakkan region in North Dakota and Montana to places where it can be used.

The pipeline would actually be an extension to the current Keystone pipeline that already runs from Hardisty to the town of Patoka, Illinois. That’s the reason that it’s called “XL”–it’s an extension to the current operation. When running at full capacity, the Keystone XL will be able to handle up to 830,000 barrels of crude oil per day. The video below explains the purpose of the Keystone XL Pipeline.

In order for the Keystone XL Pipeline to become a reality, Trans Canada has to receive approval from the President due to the fact that the project crosses into the United States from Canada. But since the Constitution states that the President cannot make the laws, and that Congress has to create a law or bill for the pipeline to be built, the issue has been languishing in Congress.

What is the Keystone XL Pipeline’s current status?

The authority to build the Keystone XL pipeline is currently the focus of two versions of a bill in the House and the Senate. The two versions need to become one bill, which will force members from both houses of Congress to work together. The biggest difference between the two bills are the amendments that have been tacked on, particularly on the Senate side. For example, the Senate, which passed its version of the bill on January 29, 2015, added on amendments that protect landowners from the use of eminent demand. The House version of the bill passed on January 9, 2015.

What is the next step for the Keystone XL Pipeline bill?

The House has said it will pass the Senate version soon, so the bill will go to President Obama’s desk for his signature; however, the White House has stated that Obama will veto the Keystone XL Pipeline Bill if it comes to his desk. If this happens, the bill will go back to Congress where a two-thirds majority will be needed to override the president;s veto. If that majority is reached, the pipeline will become a reality. If majority is not reached, the bill will go back to Congress where they will have to hammer out something else.

What are the arguments in favor of passing the Keystone XL Pipeline?

The Economic Argument

Some proponents who would like to see the Keystone XL Pipeline become reality argue that it will create jobs for Americans. The American Petroleum Institute stated that 42,000 American jobs are at stake. While exactly how many jobs would be gained through the construction, maintenance, and operation of the pipelines is difficult to estimate, it’s certain that manpower would be needed for each of these steps. The United States Chamber of Commerce stated that on its Keystone XL Pipeline Lost Opportunity Tour it encountered numerous business owners, civic leaders, and citizens who will benefit from construction of the pipeline, as the jobs it creates will stimulate other parts of the economy.

The Safety Argument

Trans-Canada, the company that will be building the pipeline, emphasizes the safety benefits. It points to the existing Keystone Pipeline that has safely transported more than 700 million barrels of the same oil to U.S. refineries since 2010 as proof of its commitment to safety and the amount of oil that it has successfully moved already. It argues that a pipeline is the safest way to move oil and natural gas. According to a recent Frasier study, there are fewer accidents with pipeline transport than with trains or trucks. Furthermore it points out that five studies and 20,000 pages of scientific review have led the U.S. State Department to conclude that the project can be built and operated with minimal environmental impact.

Energy Independence

One political concern that has deepened in recent years is the worry that the United States relies too much on outside producers for oil, gas, and other forms of energy. While the amount of oil that we import from OPEC countries has gone down over the years, we still do import significant amounts of oil from the Middle East. While the new pipeline means that we will still be importing oil, it will be from Canada, our consistent ally. Those who emphasize the need for energy independence point out that this development would allow the U.S. to separate its economic relationships from its political relationships in world affairs.

Image courtesy of Tar Sands Blockade via Flickr

What are the arguments against the Keystone XL Pipeline passing?

The Environmental Argument

Those who oppose the Keystone XL Pipeline include environmental groups, such as the Sierra Club, Friends of the Earth, and The National Resources Defense Council. In fact, the National Resources Defense council stated that “this pipeline will lock the United States into a dependence on hard-to-extract oil and generate a massive expansion of the destructive tar sands oil operations in Canada.” Environmentalists worry that “in addition to the damage that would be caused by the increased tar sands extraction, the pipeline threatens to pollute freshwater supplies in America’s agricultural heartland and increase emissions in already-polluted communities of the Gulf Coast.”

Further arguments against the pipeline come from a group of Nobel Peace Prize Laureates including former president Jimmy Carter and Archbishop Desmond Tutu, who state that the tar sands are “among the world’s most polluting oil” and their growth in Northern Alberta has high costs for the climate. They also stress that the Keystone XL pipeline is the “linchpin for tar sands expansion and the increased pollution that will follow.” The result of the increase in pollution will trigger “more climate upheaval with impacts felt around the world.”

Former Vice President Al Gore stated in his blog that the tar sands are the “dirtiest source of liquid fuel on the planet” and this pipeline would be an “enormous mistake.” Those who agree with Gore believe that the “answer to our climate, energy, and economic challenges does not lie in burning more dirty fossil fuels” but in more “rapid development of renewable energy and energy-efficient technologies.”

The Dependency Argument

Senator Bernie Sanders, an Independent Senator from Vermont, made the case back in 2014 that the Keystone XL Pipeline would move America in the wrong direction as instead of making us greener, it would make America more dependent on nonrenewable resources. Proponents of the dependency argument point out that even though we may become less dependent on foreign producers of oil, we would become more dependent on crude oil and natural gas as energy forms. Instead of exploring other energy options, such as solar or wind power, we would continue to rely on nonrenewable resources. Those who are worried about this dependency argue that we could create jobs and energy by focusing on these alternate types of energy.

The Health Argument

Senator Barbara Boxer (D-CA) explained this school of thought well in a recent speech in the Senate. She reminded everyone that the oil being transported would be tar sand oil, not the conventional crude that we are used to hearing about on the news. Tar sand oil contains 11 times more sulfur and nickel, six times more nitrogen, and five times more lead. Sulfur dioxide can penetrate deeply into sensitive parts of the lungs and cause respiratory diseases such as Emphysema and Bronchitis, while an influx of nitrogen dioxide can increase symptoms in people with Asthma. According to this argument, these problems will increase in areas affected by the pipeline.

Conclusion

The Keystone XL Pipeline is a massive pipe that will run from Canada to Nebraska and link up with other pipelines to get oil down to refineries in Texas. Bills have passed the House and Senate; however, the bills will need to be made into one large bill that will pass Congress jointly in order to be sent to President Obama’s desk.This process has been made difficult by the storm of criticism that has come from both sides of the argument on whether or not a pipeline should cross the American heartland.

Resources

Primary

Senate: Keystone Pipeline XL Bill

House of Representatives: Keystone Pipeline XL Bill

Additional 

TransCanada: About the Project

American Petroleum Institute: API Applauds Swift Senate Action on Keystone XL

Institute for 21st Century Energy: U.S. Chamber Statement on Congressional Action to Approve Keystone XL Pipeline

John Hoeven: Statement on Keystone XL

Think Progress: Find Out How Your Senator Voted on the Keystone XL Pipeline 

John Manchin: Statement on Keystone XL

Al Gore: The Dirtiest Fuel on the Planet

Nobel Women’s Initiative: Nobel Laureates Urge Obama to Deny Keystone XL Tar Sands Pipeline

Editor’s Note: This post has been updated to credit certain information to Al Gore’s blog. 

Chris Schultz

Chris Schultz is a Midwestern country boy who is a graduate of Dordt College in Sioux Center, Iowa and holds a bachelors degree in History. He is interested in learning about the various ocean liners that have sailed the world’s waters along with a variety of other topics. Contact Chris at staff@LawStreetMedia.com.

The post The Keystone XL Pipeline: Economic Breakthrough or Environmental Disaster? appeared first on Law Street.

One of the arguments in favor of hydraulic fracturing, commonly known as fracking, is that it has largely enabled the recent oil boom in the United States. Vast stores of shale oil and natural gas are now accessible in large quantities and in short spans of time. Prices at the pump and dependence on the Middle East and OPEC are both down, and domestic industries are up. Yet the key concept in the term “boom” is that it is temporary; the United States must realize that, as with any nonrenewable resource, reservoirs will eventually deplete and we will be back to square one. In the meantime, a vast web of pipelines is being constructed to accommodate for the surge and the necessity to transport the product. This raises an additional set of concerns, namely for the health of the environment.

The wells from which all this liquid gold now flows are a fraction in size to most of the ones in the Middle East. Projections suggest that domestic oil production may plateau as soon as in the next few years, and begin to decline by 2020. Thus the boom is more like a flash in the pan. Being that the oil reserves of just a handful of Middle Eastern nations total more than forty times that of the United States, the latter nation would be wise to retain productive dialogues and relationships with the former, as it is likely that the previous course of trade will resume in due time. It would be unfortunate if the United States burned some bridges in the excitement of its boom, only to find quickly that it is once more dependent on imports. Policy and national behavior are tightly tied into these environmental realities.

In the meantime, it has become necessary to bolster the infrastructure for delivering domestic oil throughout the country. Among the environmentally motivated criticisms of fracking are heavy truck traffic and volatile oil trains. North Dakota, the site of the Bakken Oil Fields fueling the boom, has endured a spike in spills, explosions, and other dangerous missteps over the last few years as production and transportation of the product has increased. It has done so in a haphazard and unregulated fashion, focused more on economic expansion than safety. A primary source of these accidents is a complicated and growing network of pipelines that have sidestepped federal inspection.

In addition to the ongoing controversy regarding the Keystone XL Pipeline, many smaller ones are being approved and constructed throughout the country. New Jersey has recently been faced with proposals to construct a slew of pipelines throughout the state. As with many states in the path of Keystone XL, New Jersey would not directly benefit from the lines, as it serves simply as a crossroads that bears all the burdens and risks. These pipes will not create new jobs or bolster the local economy.

A resolution to oppose the proposed Pilgrim Pipeline in the Northern Valley was recently voted down. If constructed, it would likely run through ecologically sensitive areas and near local water supplies. In the event of a leak or spill, which despite claims that these pipes meet safety standards is more likely than one might expect due to the explosive nature of the particular oil that they will transport, water would be contaminated and difficult to purify.

Courtesy of Mark Klotz via Flickr.

A North Jersey politician who is a proponent of the Pilgrim Pipeline indicated that arguments of the nature that the line will not directly benefit New Jersey are not sufficient because lines that run through other states help bring oil here. While this may be true, it is not persuasive for several reasons. The first is that it throws others under the bus; we enjoy that there are pipes bringing oil here and benefitting us and our economy, while those states bear heavy social and ecological risks to do so and this is presumably all acceptable. Next, complex routes of ecological motion are endangered and still threaten us. For example, another pipe will soon be constructed to bring fracked natural gas from Pennsylvania to New Jersey. Many are concerned with the possible threats this line will pose for the Delaware River, whose water is vital for the variegated regional biodiversity as well as residents over a wide geography. Thus whether a pipe runs through New Jersey to elsewhere, or in from somewhere else, threatens more complications than a localized leak. Finally, the enthusiasm for oil pipelines simply encourages too much economic investment in and social reliance on oil. The domestic boom will die out sooner than later; all these new pipelines will become useless, while in the meantime they present a surge of dangers.

A pipeline running through ecologically sensitive Alaska. Courtesy of US Geological Survey via Flickr.

Once more, investment in renewable energies is a more desirable option, as their production, delivery, and use is far less hazardous and much cleaner, and more realistically intertwined with the United States’ energy and economic future.

Franklin R. Halprin

Franklin R. Halprin holds an MA in History & Environmental Politics from Rutgers University where he studied human-environmental relationships and settlement patterns in the nineteenth century Southwest. His research focuses on the influences of social and cultural factors on the development of environmental policy. Contact Frank at staff@LawStreetMedia.com.

The post Fracking is Shortsighted in Light of Temporary U.S. Oil Boom appeared first on Law Street.

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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