A gas station in Michigan sold gas for 50 cents a gallon.
It seems so trivial, even an idiosyncratic sale some guy staked to drum up business, but it’s a blinking red light on a panel to signify a global economic shift of power and the tumultuous exchange of billions of dollars.
This isn’t as complicated as it may seem, but we’re going to walk through this step by step because it’s a big issue.
The U.S. needs a lot of oil. It has for a long time and that’s why after the economic crisis oil companies started getting oil from Shale. It’s a more costly process, but with the rising gas prices it was well worth it. So oil production went up in the U.S.
Iran has a large amount of oil in their country that they will be able to sell to the U.S. in the very near future as sanctions come to an end. Estimates have ranged from 500,000 barrels a day to 2.5 million.
Iran is a part of OPEC (Organization of Petroleum Exporting Countries) as well as Iraq, Saudi Arabia, The United Arab Emirates, Venezuela and about ten other smaller countries.
With Iran joining the global market and this increase of production from shale oil, there is a large amount of oil on the market.
Low Market Demands
On top of that, China and India are having slow markets right now, which means they need less oil.
Normally OPEC bands together and lowers production, which keeps prices high when there is a lot of oil on the market. But that’s not happening. Mostly due to the fact that some of these smaller countries can’t halt production due to their financial situations (loans, debts, expenses), so the unity of OPEC is showing cracks
This may not mean the permanent eradication of OPEC from the global scene, but it certainly is giving us a glimpse of what the world would look like without it. The countries have been desperately competing to sell their oil to the remaining market shares, forcing all the others to drop their prices lower and lower.
Keep in mind that Iran hasn’t been able to sell their oil freely in a long time, so they don’t have the kinds of standards that other countries may have. They’ll most likely accept much lower prices than what other countries such as Saudi Arabia have received. Saudi Arabia is the second largest producer of oil in the world, the U.S. being the largest.
There are certain areas that feel the direct effects of the global market because they are right next to oil refineries. Michigan is one of those places.
So, a gas station in Michigan sells gas for less than 50 cents a gallon.
But that’s not the end of the story.
First off, shale oil takes a major hit, halting production. This is because shale oil is more expensive than conventional means, which is fine when gas prices are $150 a barrel. Now U.S. crude oil is at $29.15 a barrel. Many shale oil companies break even when selling at roughly $50 a barrel. Some argue that the break even amount may be as low as $10, while others argue that advancements in technology will drop the costs further. So, the future of shale oil is still uncertain.
How will the reduced cost of oil actually affect people?
It’s a very complicated issue. While many Americans are eager to celebrate, this change causes serious problems. We’ve already seen 250,000 oil workers lose their jobs. In addition, smaller companies that can’t weather the economic downturn may go under. A reduction of competition in the marketplace could have adverse effects.
The majority of oil is used for transportation, which not only means that an average person’s daily commute is cheaper, but also the transportation of goods is reduced. Estimates put the change in gas prices for the majority of Americans to be seen in six months to a year.
Margret says
Thanks this was helpful.