The crashing of oil prices has effectively flipped the world on its head. Just a short time after many Americans were experiencing the worst economic meltdown in the modern era (a time in which prices for fuel shot through the roof), we’re seeing those same prices hit lows not seen in more than a decade. While for many, that simply means that there is less pain at the pump, or that it’s been considerably cheaper to heat their homes this winter, the good doesn’t come without the bad.
Oil prices are deeply associated with the cost of many other things, which means changes in the price of oil create price pressures for other goods and services. From transportation to manufacturing, volatile oil prices typically lead to a certain level of economic destabilization, which can worry policymakers, business leaders, and economists alike.
For much of the past several decades, OPEC has been the driving force behind the worldwide oil supply. The current members of OPEC are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the U.A.E., and Venezuela. Non-OPEC member nations like Russia, China, and Canada have also had seats at the table, but the balance of power has shifted over the past few decades, particularly as a result of increased U.S. production.
“It’s a turning point in the way people perceive OPEC, that this so-called cartel is not really driving prices,” said Jeff Colgan, a professor at Brown University’s Watson Institute for International Studies, in a report from Bloomberg. “The real story is going to be about the fracking industry. How much pain can North American producers take?”
How much pain — that is, low prices — domestic producers can take is just one of many questions Big Oil faces headed into the future.
1. Is the shale boom doomed?
The biggest concern for many Americans in the face of free-falling energy prices is how it will affect producers domestically. One of the biggest economic boons over the past several years has been huge increases in energy production in places like Texas and North Dakota, which have supplied thousands of jobs to a weak economy and helped get America back on its feet in the wake of the great recession. But, since oil prices have taken a nose dive, producers have begun offloading employees in an effort to keep profit margins intact.
A Forbes report notes that Apache Corp. is slashing 5% of its workforce, and oil services company Schlumberger is laying off 9,000 employees. If prices keep falling, and businesses need to keep cutting down on production and spending, more jobs will follow.
“All my friends and family keep talking (positively) about low prices. When I say, ‘We’re all out of jobs now,’ they say ‘Oh,'” Jeff Sharpe, a laid-off worker who was employed on a Wyoming oil rig told CNNMoney. “I don’t think they realize what’s going on in the big picture.”
2. What are the economic effects?
Aside from lost jobs stateside, other economic effects are being felt on a global scale. First and foremost, we’re witnessing a worldwide sag in demand, which is a key for suppliers who are hoping to see prices rebound. Economists at the U.S. Department of Energy expect U.S. demand to remain flat well into next year, and Bloomberg reports that slowing economies in Europe and Asia are also part of the problem.
There are many reasons for sagging demand, including more fuel-efficient vehicles, more people riding public transportation, denser urban environments, and the rise of renewable energy sources. But as we know, supply and demand eventually reach equilibrium, and if demand reductions prove to be permanent, it could lead to an ugly adjustment period with further reductions in the workforce, and political issues rising up.
“Efficiencies are permanent demand reductions that are not going to come back because prices are lower,” Tamar Essner, an energy analyst at Nasdaq, told Bloomberg. “The big driver of demand-related headlines has been Chinese growth and Europe slowing, all of which is true, but I don’t foresee enough of an uptick to alter the price dynamic.”
3. What are the geopolitical ramifications?
When a commodity as important and far-reaching as oil sees an incredible dip or spike in price, there is inevitably some instability that comes as a result. The geopolitical ramifications are particularly interesting, if for no reason other than the fact that there are so many big players effected — Iraq, Saudi Arabia, Iran, Russia, Venezuela, and the United States.
A fair first question is how, or will, OPEC react? The middle-eastern cartel, which has famously held significant sway over much of the world’s supply of crude oil, has opted not to cut production to help stabilize prices, and that has had led to a ripple across the global market. While that can be interpreted a number of different ways, it seems relatively unexciting when other world events are taken into consideration.
One other big threat to the market is from terrorism and radical fringe groups seizing oil fields in war-torn areas like Iraq and Syria. As we heard about last year, ISIS has taken over refineries and caused a huge amount of strife for both businesses and politicians, neither of which have come up with a cohesive plan regarding how to deal with them. But it’s not just ISIS, even Russia has made some powerful military moves, invading the Crimea peninsula in early 2014, and creating a hostile and dangerous situation in eastern Europe.
“The big losers from falling oil prices include several countries that are not friends of the US and its allies, such as Venezuela, Iran, and Russia,” writes Harvard economist Martin Feldstein for Project Syndicate. “These countries are heavily dependent on their oil revenue to support their governments’ spending – especially massive transfer programs.”
The issue with these countries no longer being able to depend on their oil revenues is that they will need to secure funding from somewhere else. Violently, if necessary.
As we can see, falling oil prices present a lot more issues than we might see in the United States. As the industry adjusts to take the hit on the bottom line, spending cutbacks will result in job losses, countries around the world — who depend on oil profits to keep their economies afloat — will make adjustments to secure themselves, and other sectors of the economy will make necessary changes as well.
While most of us are just glad to see a smaller price at the nearest Shell station when we need to fill up, Big Oil’s top dogs are being presented with a slew of other issues to work out over the next year. There are some big questions up in the air as we begin 2015, and how or when Big Oil and the world’s oil-producing nations respond could have much bigger ramifications for everyone than just what you pay at the pump.
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