By Rachelle Krygier
You heard that this week the largest oil price drop in years occurred, but you’re not sure why it happened or what it means.
Let’s start with the good news: you are a winner. Prices at gas pumps are down to $2.99 a gallon from $3.70 a gallon in June. That means you, or anyone who buys you Christmas presents, will have more money to spend.
Lower oil prices are a boost to consumer spending power and occasionally to economic growth. Sometimes people save additional money instead of spending it, causing it not to fuel economic growth in the short run. But at this time of the year the holidays are just around the corner and it is expected that consumers will spend almost a third of the extra income.
Prices dropped because the economy has been growing at a slower pace than expected, especially in Europe and China. And meanwhile, the supply has increased.
Who to thank?
Middle Eastern countries. Because of turmoil in the past years, they had been producing less oil, which kept prices high. But recently and unexpectedly, those same countries, including Libya, Sudan, Yemen, Nigeria and Iraq started producing more oil.
The United States. In the past five years there has been a national energy boom because with former high oil prices it was economically profitable to produce shale oil through expensive drilling techniques. The U.S. now produces 65 percent more oil than it did five years ago, according to The Guardian.
Higher supply with decreasing demand, caused oil prices to fall.
For prices to go back up, the U.S. has to cut their supply or the OPEC countries have to agree to do the same, which doesn’t appear to be happening any time soon. OPEC countries know that American producers are losing from the fall, and that they eventually will have an incentive to cut supply.
Some go as far as saying that Saudi Arabia increased its supply and lowered oil prices on purpose to get U.S. oil out of the markets while putting pressure over two main rivals: Iran and Russia.
In the long run, it is difficult to know what the global political and economic effect will be. Here’s a look at how some countries could be affected:
U.S.:
Although lower oil prices is good news for us, average consumers, and for companies whose costs fall in the short run, it isn’t for some sectors.
Those who benefit from the new energies will suffer because national producers will have lower profits. And the majority of job growth in 2014 was due to mining and energy jobs.
The most noticeably effected states will be Texas, Oklahoma and North Dakota.
A boost to the economy can also offset a stronger dollar that would hurt US exporters and national producers of any product. Domestically produced goods would be more expensive than imports, and would also be more expensive than other products in competitive foreign markets.
But hey, you and the rest of American individual consumers will most likely receive better gifts this year so happy Christmakwanzakah. Fate will take care of the rest.
Russia:
The fall will affect Russia’s economy and Putin’s political support more than the West’s sanctions over the annexation of Crimea.
More than half of Russia’s revenue come from the export of oil. The currency fell with oil prices this month. Although the country’s economy is huge, the changes in oil prices can drag down Putin’s political support because he will have to borrow more, reduce expenditures used to provide his supporters with private goods, and use money from the reserve to cover a federal budget that was set with $93 oil.
“Strong energy prices have been the rock on which the long record of economic stability of Vladimir Putin has been predicated. But plunging oil prices were responsible at least partly for unseating his two predecessors in the Kremlin, Mikhail Gorbachev and Boris Yeltsin,” writes Alec Luhn in The Guardian.
Elites will most likely reevaluate their support for the Russian annexation of Ukrainian territory, whose costs will be exacerbated by lower revenues from oil.
Obama might want oil prices to remain low which would also put pressure on Iran.
Iran
Sanctions to their nuclear program have affected Iran’s economy. But the falling price of its main export revenue, which the government has used to fund vital goods, will hit it even harder. Iranian authorities have blamed Saudi Arabia for manipulating OPEC sales to deliberately serve the interest of the G20 group (increasing the pressure on them and Russia).
Saudi Arabia
It has a huge cash reserve to balance the fall in revenues while low prices drive US tight oil production out of the market, leveraging their economic stability over Russia and Iran.
Venezuela
Venezuela was already experiencing an economic crisis with a $100 barrels. It relies only on the export of oil to pay for imports of all kinds. The currency is already devaluated to levels that have drawn increasing amounts of money outside of the country, and have made investment almost impossible. Inflation in Venezuela is also one of the highest in the world.
The government is unlikely to adjust responsible economic policies because it relies on money to fund popular social measures, like the price limit it established on Barbies to make them accessible to people before Christmas. Now that there will be less oil profits, the government will be in even more trouble. Scarcity and devaluations are likely to put it under scrutiny.
Brazil
The state has relied on increased production by state-owned Petrobras in the last years to fund social projects and pay off debts. But they will lose millions of dollars per each dollar drop in oil prices, according to Reuters. That will trouble the government’s projects.
Mexico
Mexico’s President Pena Nieto was implementing policies to encourage production of oil in Mexico, privatizing state-owned Pemex. However, investors will lose interest when potential profits decrease as a result of the drop in prices. The government will also have to cut public funding, as oil revenues from Pemex were previously about a third of the budget.
Egypt
Egypt is the highest oil and natural gas consumer in Africa. The government, which spends a whole lot in energy subsidies for oil to be produced domestically, will benefit from the fall, because it is more of an oil importing country than an exporting one. Similar things will happen in India, whose commodities account for only 9 percent of its exports and 52 percent of its imports, according to The Guardian.
