By Elizabeth Martinez,
Money and Investing Writer
Expectations for the future are often incredibly misleading. Such is the case with US shale production expectations. Though it was believed the production would be on the rise this month, the opposite occurred. In fact, since 2014 oil prices have seen a drop of around $80 from the high in June 2014 of $115 per barrel to only about $35 per barrel at the end of February of 2016. This month saw its lowest price in eleven days of only $55.02 a barrel this month.
Surprisingly, analysts continue to be optimistic, and expect shale production to rise 5.19 million barrels a day. For those of you who don’t remember much from your introductory economics courses, as the quantity of something being produced increases, the price of that product or service is often forced to drop; that is, unless there is a close to equal increase in the demand for the product.
It is important to understand why this drop in prices is occurring. When oil prices dropped during the 2007-09 financial crisis in the United States, is was thought that this was due primarily to a drop in consumers demand. In the current situation however, it seems as though the issue may be connected to both supply and demand.
A more in-depth analysis as to why supply and demand have both had an effect on current oil prices is given on the World Economic Forums website.
In summation, slowing economic growth in other nations coupled with a short term drop in oil investments and decreased global oil exchanges due to pressure to increase spending in order to help repair what was damaged during the financial crisis in heavily consumer based countries, like the United States, are what contributed to the price decrease of oil.
The effects of this drop have been so severe, that OPEC met on this past Monday in order to revise its forecasts for global oil demand and reported that they had record compliance in their first month of implementing a policy aimed at reducing crude supplies (which should help to bring the price back up.)
While some may argue that it is unethical to intentionally slow oil production in an attempt to increase profits, there may be a large social benefit from this action as well.
Specifically, an environmental benefit. Consider how much less expensive it has become to have alternative energy sources installed into homes and businesses.
The average electric bill for a US citizen is approximately $110 a month, a cost which increases dramatically when looking at southern states (which tend to receive more direct sunlight, as they are closer to the equator).
Now compare that to the average cost of a five kilowatt solar panel which can be anywhere from $10,000 to $14,000 after tax credits.
This means that if a consumer was to purchase solar paneling for their home instead of using electricity generated by oil, it would be equivalent to spending around eight years of electricity bills on something which would generate free electricity for that consumer’s household for the rest of the consumer’s life. If oil prices increase as these alternate energy sources prices continue to decrease, consumers may be more inclined to make the switch towards using renewable energy sources instead of using natural gas or oil.
It’s fair to say that oil producers may be on a slippery slope if they are unable to maintain a competitive edge with the emerging alternative energy producers.
A version of this article appeared in the Tuesday, April 25th, 2017 print edition.
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