Oil Prices Explained: Signs of a Modest Revival
By CLIFFORD KRAUSS UPDATED June 2, 2016
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Some think it will be years before oil returns to $90 or $100 a barrel. Credit Michael Stravato for The New York Times
The oil industry, with its history of booms and busts, has been in its deepest downturn since the 1990s, if not earlier.
Earnings are down for companies that made record profits in recent years, leading them to decommission more than two-thirds of their rigs and sharply cut investment in exploration and production. Scores of companies have gone bankrupt and an estimated 250,000 oil workers — roughly half in the United States — have lost their jobs.
The cause is the plunging price of a barrel of oil, which at one point fell more than 70 percent compared with June 2014 levels.
Prices have recovered a few times over the last year, and lately Brent crude crossed the $50-a-barrel threshold for the first time in nearly seven months. But prices are still below what producers need to drill profitable wells.
Executives think it will be years before oil returns to $90 or $100 a barrel, a price that was pretty much the norm over the last decade.
What is the current price of oil?
Brent crude, the main international benchmark, was trading at around $ a barrel on .
The American benchmark was at around $ a barrel.
Why did the price of oil drop in the first place?
This a complicated question, but it boils down to the simple economics of supply and demand.
United States domestic production has nearly doubled over the last several years, pushing out oil imports that need to find another home. Saudi, Nigerian and Algerian oil that once was sold in the United States is suddenly competing for Asian markets, and the producers are forced to drop prices. Canadian and Iraqi oil production and exports are rising year after year. Even the Russians, with all their economic problems, manage to keep pumping at record levels.
There are signs, however, that production is falling because of the drop in exploration investments. RBC Capital Markets has calculated that projects capable of producing more than a half-million barrels a day of oil were canceled, delayed or shelved by OPEC countries alone last year, and this year promises more of the same.
Recently, oil companies in Canada severely pulled back or stopped pumping altogether after a forest fire devastated the oil sands region. Production there dropped by a million barrels a day, roughly 40 percent of the area’s output.
Rebel attacks in Nigeria have also curtailed supplies in that region.
These fluctuations, however, may be short-lived.
On the demand side, the economies of Europe and developing countries are weak and vehicles are becoming more energy-efficient. So demand for fuel is lagging a bit, although there are signs that demand is growing in the United States.
Who benefits from the price drop?
Any motorist can tell you that gasoline prices have dropped. Diesel, heating oil and natural gas prices have also fallen sharply.
The latest drop in energy prices — regular gas nationally now averages $2.34 a gallon, roughly down about 44 cents from the same time a year ago — is also disproportionately helping lower-income groups, because fuel costs eat up a larger share of their more limited earnings.
Households that use heating oil to warm their homes are also seeing savings.
Interactive Graphic
Why Oil Is Plummeting »
Who loses?
For starters, oil-producing countries and states. Venezuela, Nigeria, Ecuador, Brazil and Russia are just a few petrostates that are suffering economic and perhaps even political turbulence.
The impact of Western sanctions 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. With sanctions now being lifted, the Iranian oil industry is opening the taps on production.
In the United States, there are now virtually no wells that are profitable to drill.
Chevron, Royal Dutch Shell and BP have all announced cuts to their payrolls to save cash, and they are in far better shape than many smaller independent oil and gas producers. Exxon has reported record low quarterly profits, and was recently stripped of its top AAA credit rating (leaving Microsoft and Johnson & Johnson as the lone American companies in the rarefied AAA group).
States like Alaska, North Dakota, Texas, Oklahoma and Louisiana are facing economic challenges.
There has also been an uptick in traffic deaths as low gas prices have translated to increased road travel. And many young Saudis have seen cushy jobs vanish.
What happened to OPEC?
In recent months, Iran, Venezuela, Ecuador and Algeria have all pressed OPEC, a cartel of oil producers, to cut production to help firm up prices. At the same time, Iraq is actually pumping more, and Iran is expected to become a major exporter again.
OPEC countries, at a recent meeting, decided to make no change, citing the recent rise in prices. (Benchmark prices recently — although briefly — went back above $50 a barrel.)
Analysts have said that setting a production ceiling might only have limited value in regulating prices. That is because many of the biggest producers, including Saudi Arabia, are already pumping near top capacity.
There was a recent shake-up in the Saudi oil industry, though it’s still unclear what longer-term impact that may have. The country’s king, Salman bin Abdul-Aziz Al Saud, may in any case find it difficult to persuade other OPEC members to keep steady against the financial strains. The International Monetary Fund estimates that the revenues of Saudi Arabia and its Persian Gulf allies will slip by $300 billion this year.
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How the U.S. and OPEC Have Controlled Prices »
Is there a conspiracy to bring down the price of oil?
There are a number of conspiracy theories floating around. Even some oil executives are quietly noting that the Saudis want to hurt Russia and Iran, and so does the United States — motivation enough for the two oil-producing nations to force down prices. Dropping oil prices in the 1980s did help bring down the Soviet Union, after all.
But there is no evidence to support the conspiracy theories, and Saudi Arabia and the United States rarely coordinate smoothly. And the Obama administration is hardly in a position to coordinate the drilling of hundreds of oil companies seeking profits and answering to their shareholders.
When are oil prices likely to recover?
Oil markets have bounced back considerably since hitting a low of $26.21 a barrel in New York in early February. There was a similar recovery last spring, but that didn’t last.
Some analysts still question how long the current recovery can be sustained because the global oil market remains substantially oversupplied. In the United States, domestic stockpiles are at their highest levels in decades, though they are coming down as seasonal driving picks up.
But over the long term, demand for fuels is recovering in some countries, and that could help crude prices recover in the next year or two.
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