What are the implications of falling oil prices?

As oil prices continue their descent, many are becoming more concerned about what this could mean for the recent boom within the US oil industry.

While American motorists are benefiting from lower gasoline prices, the implications of decreasing oil prices could very well fuel undesirable outcomes for oil companies, and related industries.

Over the past several years, US oil and gas production has steadily increased with the refinement of horizontal drilling and hydraulic fracturing techniques. Using this cost-effective approach, US oil companies are competing with the world’s largest oil producers, threatening to oust Saudi Arabia – the world’s chief oil producer – from their number one position.  

Despite the threat of the United States’ oil production keeping oil prices steadily falling and dictating the oil market, Saudi Arabia and its OPEC allies are not planning to curb their oil production. Only time will tell, but with the OPEC countries maintaining oil production, this could adversely affect US oil companies. 

As you can see in the table above, courtesy of U.S. Energy Information Administration, average oil prices are currently falling and are at their lowest since price in several years.

Even with the economic nature of fracking, the US can’t compete with the low oil production costs of the Middle Eastern countries. Where OPEC countries could tolerate barrel prices around $60 a barrel, the US will likely have to cut back on drilling if barrel prices fall below $70. And currently, Brent oil prices are hovering just above $60/barrel.   

Moving forward, we will have to wait and see how this all plays out, but there certainly are things we’ll be keeping a close eye on, including the factors that influence oil and energy prices.    

What influences oil and energy prices?

Oil and energy prices are highly influenced by supply, demand and market behaviors. As with many commodities, the scarcer the product or service, the higher the price. And vice versa.

In the case of oil and energy, supply is not only affected by current conditions, but future expectations as well. Supply factors include:

• Energy prices
• OPEC supply capacity
• Non-OPEC capacity
• Geopolitics
• Weather
• E&P costs, investments and innovations

Similar to supply, demand is also affected by current conditions and future expectations, demand factors include:

• Energy prices
• economic growth
• Industrial production
• Weather
• Goods and personal transport

Market behaviors that influence oil prices include:

• Energy prices
• Other commodity prices
• Currency exchange rates
• Interest rates
• Stocks and other assets

How do lower oil prices affect US consumers and other US industries?

In the short term, US consumers are reaping the benefits of lower oil prices in the form of cheaper gas. This in turn will help flood money into the economy, as a result of the extra money people save on gas. However, while lower gas prices will benefit the people, not all will find these price drops advantageous, including US oil companies, their workers and related industries.

As supply remains high, and demand and prices low, oil production workers face inevitable layoffs as production slows. This is especially true in North Dakota, Texas and Pennsylvania, where oil production is at its highest. Not only do oil workers face unemployment, the oil companies will likely confront financial uncertainty and instability. 

The precarious and volatile conditions are bound to extend to other industries. Including those industries who manufacture and produce the equipment, tools and resources used in horizontal drilling and hydraulic fracturing.

What do you think? Will oil prices stay as low as they’re forecasted, forcing US oil companies to make unavoidable layoffs, while decreasing the world’s oil supply and increasing demand? Will the OPEC countries survive the price drops and emerge unaffected? Share your thoughts in the comments below.