We’ve been hearing about it on the radio, on television and in newspapers and magazines. Oil prices have been falling, and it doesn’t look like they’re going to stop anytime soon. So what exactly is going on? Oil is a fossil fuel, and we’ve all learned in school that fossil fuels are limited, and shouldn’t be wasted. So why has oil become this cheap? What has led to this situation?
It all comes down to simple economics; the law of supply and demand. The USA has nearly doubled its production over the last six years, providing tough competition to mainly the Arab nations who rely on oil as a primary source of income.
Because USA has begun to use its own resources instead of buying oil from other nations, the biggest oil customer in the world no longer needs to buy large quantities of it. Moreover, Europe’s economy over the last few years has not only weakened, but has also pushed for more efficient energy consumption, further dropping demand. When supply is more and demand is less, those nations selling oil are forced to reduce their prices.
Developing nations are benefitting greatly from this steep drop in oil prices; infrastructure projects are less expensive to take up and if the government is not in control of oil prices in the country, the people have to pay less for fuel too. But this situation has its effects on the sellers of oil.
Saudi Arabia’s national budget is planned based on the assumption that oil will sell at 105$ per barrel, and with prices as low as 30$ a barrel (and predicted to hit 20$), the economy is in trouble. Despite spending cuts, if prices keep falling at this rate, or even stay stagnant at 30$ a barrel, Saudi Arabia will run out of money in five years.
This will affect the nearly 2.5 million Syrian refugees that Saudi Arabia is said to have accepted since the conflict started, and the 100,000 children receiving free education there.
Falling oil prices will have a domino effect on the economies of the world, and unless the USA reduces its production, or Europe’s demand increases, oil will continue to fall. All we can do now is wait and watch.