Oil prices have been making headlines since summer of last year. With more than 50% slashed down, the world has been wondering what has been driving oil prices this low. While there are many factors that influence oil prices, experts agree on one thing: the oil supply surplus.
Since the shale revolution late in 2000s, the United States has been drilling more of its own oil and has been relying less from imports. The country has benefited in many ways during the years since. Investors were coming in, gas at the pump has become affordable, and new job vacancies opened.
However, the market nowadays is too flooded with oil. As the IEA put is, we are “massively oversupplied” with oil. However, this oversupply can be beneficial in some sectors while others won’t be too happy about it. Here are some of the implications that oil supply glut brings.
Savings will be Passed on to Consumers
Surplus in oil supply means that there is more oil in the pump and more energy to heat homes and provide power. American car and home owners are among those who celebrate with the lower oil prices brought about by the oil surplus. Industries that rely heavily with oil in their production will also notice some savings. For instance, more Americans are now able to afford new cars and they can drive more miles.
Spurred Debates among Policymakers
For several years, the United States enjoyed its position as the main oil producer, but OPEC put its foot down and waged a silent war on oil prices. Rather than cutting back on production, the cartel decided to even increase its supply to the world market in hopes of gaining back market share and drive American oil businessmen away. But the US has been persistently producing oil at a fast rate as well and which helped grow the oil supply even more.
Policymakers have been torn between the issues that oil supply surplus brought about. There had been discussions about whether or not to allow oil exports and help ease the glut. Recently, there have also been heated talks about the Iran nuclear deal and how the Iran will further flood the market with oil.
Lesser Storage & Prices Going Down
The shale revolution has afforded drilling technologies that helped pump oil in an amazing rate. In 2008, there are more than 311 million barrels of oil in stock and the price per barrel was at $105. In 2014, there are more than 357 million barrels of oil in stock and the price per barrel was at $92. This year, we have more than 448 million barrels of oil in stock and the price per barrel is currently at $49.61.
With the production not slowing down, there have been growing concerns about where to stock the surplus oil as storage become even scarcer. And with oil at around $50 per barrel, producers need to focus more on making production more efficient rather than increasing production itself in order to make their businesses more profitable.
All in all, the 2015 oil supply glut is teaching us some valuable lessons about supply and demand of oil. A slowdown in production may take some of the worries away and investors may need to wait for some positive changes before they make any investment-related decisions.