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Significance of Cheap Oil


Written by Luca

As financial markets have tumbled in recent weeks, the price of a barrel of oil has come down with them. Peaking at $147 a barrel only four months ago, the price of petroleum has more than halved in the subsequent months. As of the last week of October the price of light crude stands at about $60 a barrel. The crash in oil prices is due to falling energy demand in industrialized countries, including China and India. But the demand has not fallen by more than fifty percent. Demand of energy is greatly inelastic, because changes to energy policy take months to take place, and therefore the fall in demand cannot have contributed to the fall in oil prices alone. The missing variable in this equation is the greedy speculation by investors, who bet that the price of oil would reach $200 by the end of the year. The price of light crude in the past year has been affected by emotion, and greed, rather than logic, and rationale. Therefore, once investors saw that the oil bubble was bursting, there was a made rush to sell the commodity, and the fall in price of oil ensued.

Power of Oil

Multiple geopolitical consequences arise from the fall in oil prices

The price of a barrel of oil holds greater significance than most people believe, as many countries depend on the revenue raised from selling oil to fund their budget. Multiple geopolitical consequences arise from the fall in oil prices, because many menacing nations to the United States that rely on oil revenues are struggling to stay afloat, economically. Countries such as Venezuela, run by Hugo Chavez, and Iran, lead by Mahmud Ahmadinejad, are straining to balance their budgets, which rely on a high price for a barrel of oil to pay for their expenditures. According to The Economist, Venezuela balances its budget with $95 a barrel of oil, and it loses about $5 billion for every $10 drop in the price of light crude. Now that the price of oil has dropped to around $60, Venezuela’s Chavez needs to determine his priorities, as he recently added multiple social programs to the country’s payroll. $95 a barrel of oil is also what Iran has based its expenditures on this year. The lost revenue has lead to questions within the Iranian government, and parliamentary members are finally raising questions on Ahmadinejad’s wisdom in confronting the United States and the European Union, which have recently pushed for more damaging economic sanctions against Iran. As recently as July, Venezuela and Iran were considered a growing threat to global security, as their control of critical oil supplies rendered the two countries vitally important to the world’s major energy consumers. Now that the price of oil has gone down, these two countries are seen as a smaller threat to global stability.

Low Price of Oil Damaging Countries

Venezuela and Iran have suffered greatly from the decrease in oil prices

While Venezuela and Iran have suffered greatly from the decrease in oil prices, Saudi Arabia is faring well, as it wisely determined its budget based upon the conservative price of a meager $45 a barrel. Even at $60 a barrel, Saudi Arabia is able to maintain all of its expenditures, but other members of the Organization of Petroleum Exporting Countries insist on cutting oil production, in order to boost oil prices. OPEC recently agreed upon a 1.5 million barrel cut in oil production, which is the equivalent of a 5% cut, according to the New York Times. But OPEC members are not yet satisfied, as they pushing for a further cut to production, as they are under tremendous pressure to maintain the funding of the budget. The dramatic cut in oil production, however, appeared to have no effect on the price of oil, which supports the thesis that the recent oil bubble was due in large part to greedy speculation.

Environment Affected By Price of Oil

Although the price of oil has significant geopolitical ramifications, it also has a large influences the developing alternative energy sector, as these new costly technologies appear less appealing with the drop in oil prices. Consumers are now less willing to spend more on alternative energy sources as they find that their bills at the gas pump are diminishing. Proponents of solar, wind, and geothermal power are now facing growing challenges with the drop in oil prices. The only way these energy sources, essential to future generations of energy consumers, will continue to develop is if the United States government provides more subsidies to this burgeoning industry. The United States government faces tough choices in the years to come, as it will need to evaluate its priorities with regards to the energy sector. Consuming foreign oil is no longer an option in a polarized and difficult world, in which oil supplies can be cut off in a matter of days.


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