Over the last couple of years, global oil prices have slumped to lows not seen since 1970. This has led to much distress for many of the energy producing countries and the oil industry.
At the beginning of 2016, many economists shared their expectation that most industries would actually benefit from low oil prices. However, this benefit was also accompanied with a warning that a cheaper energy bill would threaten to derail a driver of economic growth.
What Caused the Oil Prices to Drop?
Since 2008, U.S. domestic production has nearly doubled – pushing out oil imports. This, coupled with the fact that global economic growth has considerably reduced demand, are considered to be the main drivers of low oil prices. From 2008, U.S. production rose from 10% to 14% per year. Iran’s return to the global export market and increased output from Saudi Arabia and Russia has only increased the supply.
Globally, countries are running out of storage. In addition, U.S. stockpiles are at their highest levels in 80 years. In fact, as of the beginning of June, Brent crude – the main international benchmark – was trading around $50 a barrel. West Texas Intermediate – The American benchmark – on the other hand, was trading around $48 a barrel. Executives have shared that they fear it will be years before anyone sees oil prices return to $90 or $100 a barrel; a price that has become the norm over the last decade.
In a survey released in January 2016 by the National Association of Business Economics, it was revealed that three-fourths of economists anticipated that their business or industry would feel the effects of the price drop. 57% expected a positive impact, while 18% anticipated a negative impact.
To put it simply, supply has exceeded demand.
So what does this mean for businesses? Who benefits from these price drops, and who loses? Consider the following three ways falling oil prices will impact businesses:
Spike in Consumer Confidence
As of January 2015, consumer confidence was reported to be the highest it had been in seven years. Why? It would seem that falling gas prices played a big part in the consumer’s improved economic outlook. When consumers don’t have to spend as much at the pump or heating their homes, they’re going to spend their money in other ways. For most industries, an increase in consumer spending means an increase in business revenue and stronger financial statements.
Decrease in Operating Costs
From shipping expenses to raw material costs, lower gas prices mean lower operating costs for companies. Higher revenues and lower costs is always a welcome combination for any company. These changes will likely result in business owners effectively reducing and managing expense lines as the drop in oil prices continue.
Heightened Industry Concerns
While the 57% benefit from declining oil prices, what about the 18% negatively impacted? According to the survey by the National Association for Business Economics, the percentage negatively impacted consists of the industries that directly benefit from oil and natural gas sales. Companies that provide equipment, services, distribution to oil and gas providers, small energy companies and business in the energy sector are among the list of those that will likely experience reduced earnings. According to The Wall Street Journal, many companies have gone bankrupt, and an estimated 250,000 oil workers – roughly half in the U.S. – have lost their jobs.
At the moment, oil prices are causing some economic challenges in states like Alaska, Texas, North Dakota, Oklahoma and Louisiana. For small business owners located in areas like Texas and North Dakota with a heavy energy focus, sales could suffer greatly if the industry isn’t pushing forward and experiencing growth soon. In addition, oil-producing countries and states – Venezuela, Nigeria, Ecuador, Brazil, and Russia – are among the list of those who are “losing” to oil prices; the imbalance of supply-demand has caused both economic challenges and political turbulence in these areas.
What Does the Future Look Like?
Oil prices have bounced back since hitting a low of $26.21 a barrel in February. The beginning of June did bring with it the biggest gains in U.S. oil prices in nearly 10 months. Outages in both Canada and Nigeria moved more than three million barrels of crude from the market a day.
According to a note from Citigroup’s strategies team, the current supply-demand imbalances will likely keep Brent oil above $50 a barrel in the third quarter. The bank’s analysts went on to project that it may rise to around $65 by the end of 2017. Experts are also optimistic that, with the demand for fuel rebounding in some countries, crude prices will recover in the next year or two.
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