Crude prices have plunged by more than 20% in recent months. The fall means cheaper gas, cheaper flights, and generally good news for American consumers.
Stringer/Iraq / Reuters
OIl prices have been falling for months, and the slide could easily continue. With unprecedented instability in the Middle East, how could this be happening?
The answer, according to analysts who follow the market, is a little bit of everything, from economic fundamentals in big oil consuming countries to growth in output among some oil producers. But much more clear is the effect of tumbling prices: Low oil prices are the equivalent of a massive stimulus program for oil consumers . They're also bad news for oil exporters.
Energy analysts have been cutting their projections for global oil demand, while big producers like Saudi Arabia show no sign of slowing down production. And according to Citigroup analysts, oil at current prices around $80 is still high enough to justify North American shale producers to continue pumping it out. Less demand, the same high production levels -- it's a perfect recipe for price drops.
"Looking ahead, shale production growth can be sustainable for the medium term in the US, and could spread globally; increasingly, global oil prices may hinge on shale as "swing" production," a team of Citigroup analysts wrote in a note. Prices would have to get down to around $50 before drilling would no longer profitable. U.S. oil production has skyrocketed, going from 8.32 million barrels a day in 2005 to 12.53 million barrels a day in 2013.
Prices for Brent crude have fallen 10% in the last month to $82.65, down by more than 20% from its recent high of $103.85 on June 20. That high came only weeks after Islamic State militants took over the key Iraqi city of Mosul, precipitating a virtual collapse of Iraq's army.
If prices stay this low, it could mean consumers in countries that use lots of oil, like the US, could get a lot more spending power.
Ed Morse, the head of global commodities research at Citigroup, wrote in the Financial Times that Brent crude going to $80 (it's at $82.65 right now) would lead to $1.8 billion in economic stimulus every day, or $660 billion every year. In a call with reporters, Morse said "if this drop in oil stays where it is and gets filtered through gasoline prices that would effectively be a $600 tax credit to an average American household owning a vehicle."
Investors are nervous about global economic growth, which has a tight relationship with the demand for oil. The growth worries are especially pronounced in China, where investors fear growth is slowing, and Europe, where they fear stagnation.
Lucas Jackson / Reuters
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