Oil prices have been falling recently. As with so many things, this creates winners and losers. Consumers of oil & oil products, consumers of oil substitutes, and consumers of goods produced using oil all benefit. The steeper the drop (30% off the most recent high) the greater these consumers benefit.
The losers are the producers of the oil. Lower prices come right from the profits that oil producers would have made. Most people don’t cry if oil companies make less money, except that different ways of producing that oil have different costs of production.
As prices drop, and some producers’ incomes fall below costs, they either halt production or halt the exploration needed to replace oil that is consumed. Here is a chart showing various sources of oil and their breakeven costs:
At today’s levels, Arctic production becomes uneconomical, and oil sands & shale margins likely are slowing exploration. All three of these sources are domestic US sources, and reducing these will increase our relative dependence on foreign sources. With these sources, the US has gotten closer to matching oil production in Saudi Arabia, and closer to energy independence.
But one solution to low prices is… low prices. As world energy usage continues to rise, the loss of these marginal supplies becomes critical, so current prices may be thought of as bumping against a natural floor – breakeven for these sources.
Unless the developed world sinks into a global Depression, which is far from out of the question. Japan’s stupid, Keynesian policies have driven it back into Recession, Europe is on the brink, China’s numbers are well off the 7-10% growth pace that seemed normal for them, and the US Economy, now that QE3 has ended, is in danger. (Even in Recession, a country still uses a lot of energy, so the current level still may be near a floor.)
Countries also can be winners or losers from oil price changes. Besides the US becoming more dependent on foreign oil, domestic operations which stop operating don’t pay taxes, so the Deficit may get worse. Lower prices for continuing operations also will hurt Russia, Venezuela, Middle East Countries, and other big producers/exporters.
China and most Asian countries, which import a lot of oil will be big winners. And since their manufactured products use a lot of energy in the process, low prices also will help Asia.
For now, we can just look forward to a holiday season approaching as US consumers have more money left in their pockets after paying for gasoline and home heating oil. And since US business users of energy, like airlines and aluminum manufacturers, save on the price drops for oil, there may be some new jobs created.
Just be aware that prices both can rise and fall. Somewhere down the road, oil prices will head upward again, and many winners and losers will trade places.
Note: Frank Holmes article, Explore and Discover the Winners When Gas Prices Fall, over at www.Silver-Phoenix500.com, was a major source for this article.