Why is my gas so cheap?
Explainers: Wherein a student expert and a student artist make sense of the complex.
Editors’ note: We started this magazine in the hopes of bringing to light the creative sides of our fellow students. Beyond that, we want to showcase your expertise in topics we might find too daunting to tackle. Thus was born “Explainers” — an outlet for student experts to work with student artists to share knowledge with the community. First up, energy investor Sam Stoutner and Blot, inc. founder Alli McKee answer the question, “What’s up with oil prices?”
Low Cost of Capital and New Technology = Higher Production
For oil producers, the post-financial crisis era brought with it a flood of inexpensive and optimistic capital.
At the same time, the industry was in the midst of a technological revolution which enabled — for the first time — the development of North America’s vast shale oil resources.
Due to the ensuing explosion of new investment, U.S. crude oil production during this period more than doubled to almost 10 million barrels per day.
Global Oil Cartel Flips Supply Paradigm
Oil is produced in over 100 countries around the world, with production concentrated among OPEC (13 member nations including Saudi Arabia, Iraq and Iran), the U.S. and Russia.
Traditionally, OPEC has acted as the world’s swing oil producer, carefully managing supply to keep prices high. However, in a recent effort to protect market share, OPEC has increased production even as global supply has exceeded demand. OPEC is generally able to produce oil at a lower cost than the rest of the world, so near-term supply decreases are likely to come from non-OPEC sources.
Strong U.S. Dollar and Weak GDP Growth = Lower Demand
Crude oil is a globally-traded commodity, used primarily as a transportation fuel after being refined into gasoline, diesel and jet fuel. By a wide margin, the largest global consumers of crude oil are the U.S. and China. Global oil demand is influenced by a number of factors, including global GDP growth and the strength of the U.S. dollar. A stronger U.S. dollar makes oil more expensive for the rest of the world, which reduces global demand.
Recent weakness in emerging market growth and the continued strength of the U.S. dollar have weighed on global demand growth amid the expansion of supply.
The End Result? Oversupply.
The global crude oil market is currently oversupplied by approximately 2 million barrels per day, which has led to a decline in oil prices from over $100 in early 2014 to around $30 today.
The resulting lower gasoline prices are a welcome development for the U.S. consumer, particularly for lower-income Americans who spend a larger share of their incomes on gasoline. However, lower oil prices have also resulted in job cuts and reduced investment among oil companies, resulting in significant pain for those closest to the industry.
Up next — Up to you. Submit your interest as an explainer, an artist, or both to firstname.lastname@example.org for our Spring 2016 issue.