Supply/Demand: Crude Oil

Crude oil can be described as the most important natural resource for industrialized nations, as it generates power, fuels vehicles, and is used in almost every chemical product manufactured. Often used as an indicator for an economic pulse, global markets are preparing for the worst. The price of this valuable commodity has drastically declined over the past 12 months, hitting a low since the 2009 economic crisis. Many factors are considered while determining the pricing and availability oil, yet almost all of these factors can be narrowed down to basic economic terms: supply, demand, and relative monetary value.

Currently, the global supply of oil outweighs the decreasing demand to a concerning degree as the OPEC refuses to decrease production. In the US, and many other industrializing nations, domestic oil production continues to show increasing outputs through fracking. At the same time, OPEC continues to produce near record highs despite the growing oversupply of oil. As the supply rises to new heights, many nations are focusing on eco-friendly practices causing the demand to fall. With supply greater than demand, crude oil markets are at a steady decline on a global scale, all while Saudi-controlled OPEC takes a seat on the sideline.

Whilst supply is increasing substantially forcing the market price downward, expectations seem to only make matters worse. Iran is in the process of shutting down nuclear productivity, which will allow them to become a big player on the oil market once again. OPEC also announced that the group would allow Indonesia to reactivate OPEC membership, which is expected to add almost 3% to the group’s current output. Within a flooding market, Goldman Sachs believes, worst-case scenario that market price could diminish to $20 per barrel.

Along with the overwhelming supply on the global market, the US dollar index resumes to soar following the recession in 2008. A stronger US dollar indicates a relative fall in the value of oil, although the magnitude of the fall is disputed. Foreign economies with a weak purchasing power are impacted the most, as demand equilibrium occurs at a price lower than market value, decreasing the overall consumption of oil.

As such a valuable commodity on the global market decreases in price, effects are felt on a global scale. The real winners are the consumers, as prices hover around $2 per gallon. The losers compile of much larger group including oil-producing companies and the energy industry. Oil production is at an all-time high, yet US oil-producers are scaling back in order to stay profitable. All while the energy industry is neglected due to the low cost of oil and gas. These factors have contributed to a rapid decline in the price of oil.