Low Oil Prices Impact on International Economy & World Business

Oil prices have fallen significantly over the last few years, and there seems to be little to no signs of change as we head into 2017. Low oil prices have become one of the biggest concerns in the oil and gas industry.

But what caused it and how will low oil prices impact the international economy and world business in the future?

Why are Oil Prices So Low?

It’s simple economics. Oil prices are low because companies are still producing oil even with decreased global demand. Essentially, oil prices drop because the supply of oil outweighs the overall demand for it.

The United States has become a top oil producer. In fact, oil production in the US has doubled over the last several years. As a result, the country’s production surge has led to a global glut.

While oil production is rising, consumer demand is falling. Weak economies in Europe and developing countries as well as the prominence of energy-efficient vehicles has caused global demand to drop significantly.

Combine these issues and you get low oil prices.

Low Oil Prices and the International Economy

The price of oil has managed to bounce back a few times over the past couple months, but the global glut is keeping the cost for a barrel of oil low. Currently, oil prices range from about $40 to $50 per barrel, and many international countries are suffering because of it.

In Russia, the consistent decrease of oil prices had led to a steady decline in revenue. According to the BBC, Russia loses about $2 billion in revenue for every dollar oil prices fall.

On top of that, low oil prices have resulted in lower earnings for many global companies and producers. Because of this, companies have been forced to decommission more than half of their rigs and reduce their investments in exploration and production, according to The New York Times.

Some companies have even gone bankrupt, which caused more than 250,000 people across the globe to lose their jobs.

The effect that low oil prices has had on the international economy has gotten so severe that the Organization of the Petroleum Exporting Countries (OPEC) has proposed freezing oil production in efforts to raise prices.

Reuters reported that OPEC plans to lower production by 700,000 barrels per day, which would bring their oil production to about 32.5 to 33 million barrels per day. As of now, OPEC is producing about 33.24 million barrels per day.

Plus Side to Low Oil Prices

While low oil prices have negatively affected the international economy, many forget that declining prices can lead to great long-term benefits.

In a recent Bloomberg article, BlackRock Inc. Chief Executive Officer Laurence D. Fink noted that low oil and gas prices will help both consumers and the global economy in the long run. “The reality is 4 billion human beings are going to have cheaper energy, cheaper heating, they’re going to have more disposable income,” he said. “And ultimately that’s going to re-accelerate the global economy. It may take six months; it may take a year, but this is all good.”

For updates and news about the global oil industry, read CPV Manufacturing’s blog.