Oil Prices Are Record Low, But What Does That Really Mean?

Americans have been celebrating consistently low gas prices over the last few years, but how long can we hope for this to last? To find the answer, it is helpful to understand the large-scale factors at play behind the oil industry.

Crude oil is one of the most important natural resources in the world. Cars, airplanes, and all sorts of machinery are fueled by it. It is used to generate heat and mixed with chemical products to make plastic, detergents, DVDs, furniture, textiles, clothing, and even some medicines. Day-to-day life without oil would be nearly impossible.

The low price of oil in America is a simple matter of supply and demand. At present there is a glut of oil available, but not a huge demand. The U.S. is producing more oil than ever due to "in-house" methods like fracking. At the same time, Saudi Arabia and other OPEC countries continue to produce oil at high levels.

Meanwhile, the weakened state of many national economies around the world means that the overall global demand for oil is weak.

This feels good for Americans who are enjoying low prices, but low demand indicates a "fragile global economy," according to a recent NPR article. And since oil is very important to every country in the world, whenever oil prices shift there are bound to be political and economic ramifications.

Take Russia and Iran. Both the Russian and Iranian economies depend on the ability to export their oil at prices significantly higher than the current price of around $84 per barrel, according to The Economist. Many economists predict an economic slump if the price of oil continues to drop, which would cast a shadow on the lower prices at the pump.

The upside to this, in terms of Russia and Iran specifically, is that this economic pressure could encourage these countries back to the United Nations negotiation table, which would be good for global cooperation.

Do you think it is in America's best interest to continue developing our own energy resources? Share in the comments below!

Be the first to comment