Yesterday, I outlined the background of Alaska's economy in relation to the price of oil and how the current price is affecting the economy. Today, I will show the root causes for the recent decline and will wrap up on Friday with the reasons we should be optimistic for the future.
What are some of the major root causes of the recent price decline?
- Sustained high prices led to an increase in new exploration investment. Many previously marginal fields became economically viable at $100, which in turn led to dramatic increases in supply.
- The U.S. market became a net exporter of energy from a boom in domestic supply coupled with a slight decrease in demand.
- More energy intensive manufacturing moved to other parts of the world like China where coal is more prevalent.
- Technology has reduced the marginal cost of production in some fields and allowed previously uneconomic fields to be produced using new techniques.
- Saudi Arabia has not supported falling prices like they have in the past by using OPEC to constrain supplies. They appear to be trying to punish rival Iran, who is more sensitive to prices in their budget, and possibly see a chance to put smaller high-cost producers out of business to recapture market share.
- The U.S. dollar strengthened against a global basket of currencies last year. Oil is traded globally in dollars, so a strengthening dollar allows you to buy the same amount of oil for a lower price.
- Global economic concerns have led to lower world GDP expectations and therefore lower oil demand growth in the future. The European economy is still fragile, Japan has been stagnant for two decades and China is seeing slower growth rates. Weakening US power, turmoil in the Middle East and Russian aggression have added to the instability in global trade.
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