Oil prices briefly dropped below $30 for the first time in over a decade, which is good news for anybody filling up their car, but a potentially troubling sign for the global economy.
On the plus side, cheap oil is good for US consumers. Spending less at the gas pump means people are better able toafford other expenses, like restaurants and shopping sprees.
But low oil prices reduce people’s incentive to go green, slowing the transition to renewable energy. And they pose a big challenge for oil-dependent countries all over the world.
Why are oil prices falling?
It’s textbook economics. New sources of oil — including here in the US and in Canada — have added significantly to the global supply. And at the same time, demand for oil has fallen, thanks in large part to the slowdown in China
It helps, too, that nobody is trying to stop the slide in oil prices. That responsibility would normally fall to OPEC, a group of oil-producing nations that works together to set prices and output levels. OPEC could try to push prices back up by limiting production.
To date, the organization has repeatedly decided to keep production at current levels, but members are increasingly bristling at the laissez faire approach and there’s talk of an emergency meeting in the months ahead.
As a result, the price of crude has dropped roughly 70 percent since the fall of 2014, from over $100 a barrel to around $30. That’s a substantial decline, though it’s worth noting that current prices aren’t exactly unprecedented (from the mid-1980’s to the mid-2000’s, prices were consistently below $40.)
How do oil prices affect me?
If you drive, you’ve probably noticed the fast-falling price of gasoline, but really that’s just the beginning of the story.
Lower gas prices make it cheaper to move goods from factories to stores, helping to push down prices.
Home heating oil gets more affordable, too (though rates for electricity in Massachusetts are already locked in).
Plus, oil is everywhere. It’s in your house, your gadgets, your kids’ toys, and almost every piece of plastic you’ve ever touched. So when the price of oil goes down, lots of other things also get less expensive.
Might low oil prices hurt the economy?
While a dip in oil prices is generally good for the economy, the effects are not all positive.
With the US now the world’s leading oil producer, the fall-off has hurt a major industry here at home, with over a thousand rigs shut down since last year and
a substantial loss of jobs. The worst effects are concentrated in a few oil-dependent states, likes Alaska, Louisiana, North Dakota, and Oklahoma.
The type of oil we have in the US is very expensive to extract. So when oil prices are low, it just doesn’t pay to keep the rigs operating.
What does it mean for other countries?
Oil-rich countries around the world depend on oil revenues to balance their budgets and pay for basic government programs. In many cases, the oil companies are actually nationalized, meaning they’re owned by the state. So when profits at these companies are down, it’s the government that ends up short on money.
Russia, Venezuela, and Nigeria seem to be in an especially dire position, liable to face ongoing budget problems if oil doesn’t bounce back to the $100 per barrel range.
But Saudi Arabia, too, has been forced to slash government programs and has even started talking about raising money via an IPO for its state-owned oil company.
Will low oil prices speed climate change?
They certainly won’t help. When gasoline is expensive, it gives people a reason to bike, rather than drive, just as it gives countries a reason to invest in clean technology.
When diplomats gathered in Paris last month to finalize a global agreement on climate change, there were serious concerns that low oil prices might undermine the effort.
What happens next?
From a policy perspective, now might be a good time to raise the US gas tax. With oil prices having fallen so dramatically, it’s possible to increase the gas tax, put that money towards fixing our country’s troubled infrastructure, and still have low prices at the pump.
Given the realities of Washington politics, this doesn’t seem likely. But at the very least, consumers can enjoy the extra pocket money and wait to see how whether sub-$2 gas becomes the new normal.
This story was originally published on January 6 and has been updated to reflect continuing declines in the price of oil.
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Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the U.S. He can be reached at email@example.com. Follow him on Twitter @GlobeHorowitz