According to some experts, years may go by before oil returns to the $90-$100 prices that were basically expected for the past decade.
The oil industry has a history of booms and bursts, but the current downturn of 2015 and 2016 is perhaps the deepest since the 1990’s.
Earnings are down substantially for a variety of companies that were making record profits in recent years, meaning they’ve had to decommission more than two-thirds of their rigs and sharply cut investment in oil exploration and production.
So how and why is all of this happening? The answer is rooted in the fact that the price of a barrel of oil has fallen by more than 70% since June of 2014.
The current price of oil is about $33 barrel.
To get deeper into the question of why oil prices have dropped, it comes down to the simple economics of supply and demand.
Because United States domestic production has practically doubled over the last several years, meaning that oil imports have been forced to find new markets. That means Saudi, Nigerian and Algerian oil companies that lived off the United States’ loyal clienthood were suddenly forced to compete in Asian markets. Producers accordingly were forced to drop prices.
Production is now falling because of the drop in exploration investments. According to consulting firm Wood MacKenzie, there are almost 70 different oil and natural gas projects worldwide that have been temporarily put on hold due to the decrease in gas prices. RBC Capital Markets also calculated that projects capable of producing over half a million barrels of oil daily have been cancelled, delayed or shelved by OPEC countries alone last year. And this year promises to be no different.
That said, the drop in production is still not occurring fast enough considering the production occurring in the deep waters of the Gulf of Mexico and Canada, which are continuing to build in tandem with new projects coming online.
Accordingly, diesel, heating oil and natural gas prices have fallen sharply. Attentive motorists are happy, as are lower-income groups for whom gas prices would eat up a larger share of their limited earnings.
Oil-producing countries and states like Venezuela, Nigeria Ecuador, Brazil and Russia have all suffered economic and political turbulence as a result.
Western sanctions have also caused Iranian production to drop by about one million barrels a day in recent years and blocked Iran from importing the latest Western oil field technology and equipment. The recent lift of these sanctions along with the Iran Nuclear Deal have led many to predict that the taps on production in Iran will soon be open. Especially since the United States no longer has any wells that are profitable to drill. That means oil states like Alaska, North Dakota, Texas, Oklahoma and Louisiana are going to face some economic challenges.