Factors of oil price drop

courtesy of wikimedia commons  GASOLINE PRICES in the U.S. have dropped recently, caused by both a fall in demand and a rise in supply. Geopolitical developments in Iran, Russia and Venezuela have lowered the price of crude oil, and may weaken these national economies.

courtesy of wikimedia commons
GASOLINE PRICES in the U.S. have dropped recently, caused by both a fall in demand and a rise in supply. Geopolitical developments in Iran, Russia and Venezuela have lowered the price of crude oil, and may weaken these national economies.

Commentary by
Brett Auriemma

While on a drive with my relatives through the suburbs of Scranton this past weekend, I noticed something that seemed out of place. For the first time in what seems like a decade, gas prices were nearly down to $3 per gallon again. My economically oriented mind could not help but wonder what factors were responsible for such a steep drop in the price of gasoline. It came as no surprise when I did some research and discovered that the culprit for the falling price of gasoline was an enormous drop in the price of crude oil, the major ingredient used in the production of gasoline. In fact, since June of this year the price of a barrel of oil has plummeted by well over 20 percent, an event that has far-reaching repercussions both at home and internationally.

Basic economic theory indicates that a drop in the price of a good normally correlates with a higher supply of the good on the market or a decrease in quantity demand of the product. As it turns out, both of these factors are partly responsible for the current oil price drop. Not only has increased supply from America flooded the market and caused a price decrease, but less demand from China due to worse-than-expected economic growth forecasts has also been a key contributor. With so much oil on the market but fewer potential buyers, countries in the Organization of the Petroleum Exporting Countries and other oil producers such as Russia are collectively making much less money from selling crude oil. Since oil production and sales is such a large industry for these nations in both production and sales, there is fear regarding how much of a negative impact this current situation will have on their respective economies.

However, what seems like gray storm clouds on the horizon for oil-producing nations may actually be a silver lining for American consumers. As it turns out, some analysts believe the drop in oil prices since June has actually saved the average American household $600.

Furthermore, many of the key oil-producing nations, including Russia, Venezuela and Iran, have recently engaged in foreign policy that has been widely interpreted as being staunchly anti-American. These three autocratic governments certainly cannot feel too comfortable now, as they are basically hoping that America will produce less oil in order to drive prices back up. Therefore, if we as Americans want to see our country’s purchasing power increase even more relative to the nations that oppose us, it is in our best interest to support further oil production and hope for prices to keep dropping.

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