December 22, 2014

Why Do Oil Prices Continue to Fall?

Those who drive their own cars surely must have noticed that the price of gas has gone down in the past few weeks. When I put gas in my car last week, the gas boy was happy to inform me that my timing was perfect because they had just rolled back prices that morning.

I am sure many consumers are happy with the reduced prices, but the question is why are prices falling and how long will this last?

Many people are quick to blame OPEC for the decline in prices. OPEC though is quick to deny that they are the direct reason. Although their refusal to cut their output in the face of excess supply is sure to have, at the very least, been the indirect reason.

Speculators point to political reasons why OPEC has refused to prop up the price of oil by limiting their output, and thus lowering supply. 

But I believe at this point it is simply a business decision. They stand to benefit from declining oil prices because their oil is produced very cheaply compared to other countries. This way, OPEC is putting pressure on these other countries to either cut down their own supply to the market or sell their oil at a loss.

In a way, OPEC is trying to squeeze these less efficient players out of the market so that they regain more control. Once these players fall out, OPEC is back in the drivers seat. The low oil prices also have the effect of stimulating more consumption leading to growth and higher demand.

There maybe greater forces in play here other than supply and demand which will ultimately effect how long this lasts. For now, as a consumer, the best thing to do is to enjoy the low prices while they last.