Falling Energy Price Could Be a Mixed Blessing
By admin November 26, 2014

oil price slide

The oil price has fallen by about 25 percent since June. This is translating to lower prices at the pump with many states now below $3 a gallon. Falling global oil prices clearly is good news for consumers. At present levels, these lower oil and gas prices equate to a $200 billion cost saving for American consumers and businesses. That is $200 billion a year the United States does not have to send to Saudi Arabia, Kuwait and other foreign nations.

There are several causes that lead to the current energy price slide. The changes in world supply and world demand since last year serve as the major reason. There have been higher supplies from Iraq, Libya, Saudi Arabia, and America’s continued production. The world has enjoyed the rise of U.S. shale oil, which has become, in the last several years, an energy-producing powerhouse. On the demand side, there was a drop in demand, to a certain extent. China’s demand did not grow as expected. U.S. adjusted its vehicle fuel efficiency requirements. And the Euro is falling, making it more expensive for the EU countries to import oil. In addition to the changes in supply and demand, the adjustment of policies on oil exporting countries also contributes to the declining energy price. Saudi Arabia, for instance, reduced the price of oil sold to the U.S. to ensure a market share in the United States.

Besides benefiting the consumers, the falling energy price could prove to be an unexpected stimulus as it may spur consumer spending and investment in business. Adam Slater,senior economist at Oxford Economics,predicts that if the fall in oil prices is sustained, this could add 0.4% to the GDP for the US over the next two years, and 0.8% for China. However, falling oil prices are hurting countries highly dependent on revenues from oil, such as Venezuela and Russia. In the United States’ case, the effects are mixed too. While stocks have risen within the transportation industry, especially for airlines, stocks have fallen for major oil companies, such as Exxon Mobil and Chevron. Energy stocks predicted to be negative for the rest of the year. If the prices continue to stay down, U.S. producers will have to cut production. According to a new global energy survey by the International Energy Agency, falling global oil prices may be good for American consumers but will pose new challenges for America’s producers.

Therefore, this calm in the oil markets should not disguise the challenges and problems that we have in front of us. OPEC is due to meet in Vienna later this month, which will have a potential impact on the energy price, for instance, if OPEC countries agreed to lower their oil output the prices will likely be heightened again. Thus, it is worth to keep an eye on the progress and agreements reached from this coming OPEC meeting.

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