A few days ago, I filled the tank of my dad’s car with $35.00… and he drives an SUV. Not gonna lie, I have missed the 90s.
Ever since last year, oil prices have been plummeting. The only way you wouldn’t have noticed this is if you have lived under rock.
No, scratch that, with the production and fracking boom that has been going on in the United States for the past few years, your rock would have probably been affected, too.
Given that this decline in oil prices affects everyone, regardless of the country in which he or she lives, it is prudent to know how we got here and how it impacts us.
The world’s oil production has been controlled, in large part, by the Organization of the Petroleum Exporting Countries (OPEC). This organization has 12 members, which includes the usual suspects: Saudi Arabia, the United Arab Emirates, Venezuela and Iran. Russia has also been a significant player throughout the years, but it is not a member of OPEC.
Everything was good for these countries, until companies in the United States saw that oil prices were very high. This, coupled with improvements in technology, allowed those companies to take advantage of America’s huge shale oil reserves.
Aside from the shale oil reserves, oil rigs in Texas also saw a revival, boosting production even further. When you add all of these factors up, the US could, in theory, become energy independent. This means they would not have to import oil from other countries.
Last year, thanks in small part to the economic slowdown of several emerging markets, the strengthening of the US dollar and in large part to an oversupply of oil, prices began to plummet.
Unlike some of the more recent plunges in the price of oil that were caused primarily by low demand (which is known as demand shock), like the one in 2008, the one we are going through has occurred thanks to a supply shock.
If you are into history, here is a quick fact for you: We have not had one of these since 1985-1986. You would think that given the fact that oil prices are going down, oil producers would start to decrease the supply. This is not going to happen anytime soon, at least not according to the Saudi Prince.
Saudi Arabia and other OPEC members do not want to lose market share, so they will keep on pumping oil. Some people even speculate that they want to drive US producers off the market. We will have to wait and see if they keep their word, and see what happens next.
Now you are probably thinking, ‘Okay, enough with the history lesson, how does this affect me?’ You see, it depends.
Not everyone is affected or going to be affected in the same way. It all boils down to the country in which you live. Let me give you a perfect example of how countries that are very close to one another are being affected quite differently by the same situation.
I can tell you that here in Panama we are having quite a good time. Even though we are not an oil-producing country, we have the cheapest gas in Central America. With prices going down, consumer confidence has been going up, and the Consumer Price Index (CPI) has seen a significant slowdown.
But, when you move a few clicks down south to Venezuela, the situation is terrible. Since they have a socialist government that has destroyed the country, they need oil at $110 per barrel to break-even (it currently trades under $50).
Economic and financial analysts are basically saying the country is going to default on its debt. Things are a disaster down there, which might seem amazing to a lot of people because they have the largest oil reserves in the world.
Another country facing a very similar situation is Russia.
The United States is facing a very particular scenario. Some people are rejoicing because gas prices are down, which means they have more money to spend on other things. However, there are some folks who have been hit hard already.
In Texas, some people have already lost their jobs, or received pay cuts due to what’s going on. As long as there is a net positive outcome for the majority, things will be fine. Not so fast, though.
There have been several reports (a couple of them here and here) stating that the reason why it was easy for many companies to enter the oil industry was not only the technological improvements and high oil prices of the past few years, but also the easy money received from the Federal Reserve.
It will be a textbook example of malinvestment. If this is true, we are going to see a huge economic collapse that could end up reversing all the positive aspects we have seen so far.
I wish I could tell you we are going to see a happy ending from all of these things — I really do. Unfortunately, I cannot predict the future, so I can only hope for the best.
In the meantime, I’m going to keep enjoying the low gas prices, head to the beach and pretend nothing’s wrong. Everyone knows that if you ignore a problem long enough, it goes away… right?