The story starts with skyrocketing oil prices
Written by Gary Silverman, CFP®
Every American knows the price of oil has dropped…a lot. This fact seems to have depressed a lot of Texans. Many in the Middle East, Russia, Venezuela, and other parts of the world are also feeling the pain. Yet the drop in energy prices has most everyone else celebrating.
Over the next few weeks, I’ll take a look at the subject. No, I’m not going to predict when the price of oil will reach triple-digits again (though we will talk about it). Rather I want us to look at the good, the bad, and the mostly unpredictable nature of this beast.
Just given the fact that oil sells for less than a quarter of what it did just a few years ago should tell you something dramatic happened. One would expect that given such a dramatic move we’d see some dramatic effect in the economy. Yet back when oil was sitting at $120 a barrel I think that “muddling along” was a good description of the economy. Now that oil is around or under $30 it seems the “muddling along” is still valid.
What happened? Or, more to the point, what didn’t happen? First a disclaimer: I have no expertise in oil, nor am I an economist. There’s a lot to this story, and I’ll be skipping a lot of the specifics to try and make it a bit easier to follow.
If you remember, when oil was selling at an ungodly price, many economies of the world were going strong…especially China. They were pretty much gobbling up just about all the commodities of the world. They needed oil, copper, cement, timber, and Kentucky Fried Chicken. Just because they needed more and more didn’t mean that all the other countries on earth all of a sudden needed less. So companies and countries began bidding up the limited supplies that were available. It didn’t hurt that the Middle East was in turmoil and Iran was under sanction. Prices soared. And Rick Perry could brag about the economic miracle that was Texas.
Funny thing about prices going up…it tends to have two effects. Those who are the buyers look for ways to use less of whatever is costing more. That might be by finding a substitute or ways to economize. Sellers want to meet the high demand by producing more product. And seeing the profits others are making, new suppliers enter the field.
Governments of the world required cars to get more miles per gallon. Fleets of vehicles were shifted to electric or natural gas. Carpooling became popular again. And folks traded their SUVs for sub-compact cars. Fracking had been around for a while, but it became a household word. More and more rigs were going up, new operators were moving in next to the seasoned oil producers, and more people found lucrative careers working in the oil patch.
Early on this moderating of demand and additional supply slowed the rising prices. Whether the prices stopped rising altogether or even started going down really depended on how the forces that were causing the rising prices fared against the forces trying to cause prices to decline.
Next week we’ll cover what happened.
This article was published in the Wichita Falls Times Record News on February 28, 2016.