When it comes to the reasoning behind falling oil prices, there is only guilty until proven innocent. As crude oil prices float around $50, it is important to consider what caused this 50% decline from less than a year ago in the first place. While consumers in oil-importing countries rejoice at lower gas prices, Venezuelan economist José Toro Hardy worries about the reasons behind the sharp decline. Hardy identified the 2 key reasons: slowing global demand and a surplus of oil, brought in part by increased American production. Supply and demand are driving the market. It is simply basic economics. The Organization of the Petroleum Exporting Countries (OPEC) reported that it expects global demand for its crude oil to fall in 2015 to 28.92 million barrels per day (bpd)--the lowest level in decades. This would cause a surplus of over 1 million bpd in 2015. An easy fix is to cut output, yet Saudi Arabia is urging fellow members to combat the growth in U.S. shale oil, thus making oil prices plunge even further. As OPEC members refuse to decrease their production, the supply remains high and prices remain low. Thus, it is inaccurate to suggest that the excess supply of oil is irrelevant to falling oil prices. Fracking (the process of drilling and injecting fluid into the ground at a high pressure to release natural gas inside) has increased in the United States by 3 million barrels a day. As a result, the U.S. has reduced its oil imports by nearly 30%, so traditional suppliers like Nigeria are not exporting to the U.S. And the U.S. is not the only eager country! Brazil and Russia are pumping oil at record levels. With figures like these, it makes no sense to minimize the role of either increasing oil supply or decreasing oil demand.
There is no doubt that supply of oil and dismal demand are to blame for the plummeting prices. U.S. production of shale oil is increasing and OPEC members are attempting to outlast this production. Supply and demand are guilty. Case closed.
Editor’s Note: This piece is one of two op-eds framed around the question, “Do Market Fundamentals Explain the Oil Price Decline?” It takes the affirmative position. To read the opposing view, please read "Don't Forget the Animal Spirits" by Kevin Grant McClernon.