Oil falls below $40 for first time

Published: November 20, 2015

Photo  Courtesy of WikiMedia Commons THE DROP in gas prices has been directly influenced by the drop in oil prices over the past 18 months.  Wednesday oil closed at $40.88 showing that there is a level of resistance at $40 in the market. This will help to keep the market from going too far past $40.

PHOTO COURTESY OF WIKIMEDIA COMMONS / THE DROP in gas prices has been directly influenced by the drop in oil prices over the past 18 months. Wednesday oil closed at $40.88 showing that there is a level of resistance at $40 in the market. This will help to keep the market from going too far past $40.

MICHAEL HANIFIN
Staff Writer

Now I know what you might think, because it is the big question on most people’s minds. How much lower can the price of crude oil per barrel get? Maybe that is not exactly what you were thinking, but it is certainly some good food for thought that is pretty difficult to simply speculate on. You have to be asking these kinds of questions after the price dropped below $40, or more precisely $39.21, a barrel on Nov. 13. Where could it possibly go from here? If history is any indication, it may not go much lower, considering the fact that oil has not been this low since about 2009, but then again I could be very wrong. After all, ever since the price slumped mid last year, no one really thought that it would have this drastic of a nose-dive, and yet it has, but why?

The answer is actually quite simple. Ever since about the middle of last year, the Organization of Petroleum Countries has increased its output in order to put pressure on rivals, and they have since not slowed down production. Naturally, this created a global surplus because the more abundant something is, the less valuable it becomes, most of the time. This has left OPEC stuck between a rock and a hard place.

On one hand, it is increasing its market share since its prices are lower than its rivals’, but on the other hand, its revenue is diminishing because prices are so ludicrously low. Right about now, it is up to OPEC to choose the lesser of two evils and decide what will be more profitable for it, and right now it seems as though it is leaning slightly more in the direction of raising the prices rather than sustaining high levels of output. It has been forecasted that if the current price persists throughout the year, OPEC’s annual revenue will only be about $550 billion. This may sound like a lot of money, but in reality over the past five years OPEC has, on average, had revenue of about $1 trillion. That is a rather large difference that OPEC is not comfortable with, because this could directly cause Saudi Arabia, the group’s largest member, to have a budget deficit that will exceed 20 percent of gross domestic product.

Kevin Munns, a junior economics major and active member of PRISM here at The University added, “I am shocked that this happened, but I believe that this means that oil prices are close to rock bottom and that people should start buying shares in oil companies and oil on the commodity markets. This is a great opportunity to make some money. This is just the flow of the markets and I expect them to correct themselves sooner rather than later.”

Inversely, Jordan Den Herder, another junior finance major with a math minor and sector head of PRISM, contradicted Kevin’s opinion by saying, “Oil being so low is great for consumers, helpful definitely for consumer goods companies and certain energy companies. Realistically, I’m not bullish on oil coming back much higher than like 50 or 60 in the long run.

Furthermore, with alternative methods and energy sources being used, as well as with tracking and the massive influx of oil that is being generated. I think oil will remain very low, and unless they have an alternative product, oil companies are in huge trouble.”

This is not the first time these two have disagreed on something. In fact, I might even be as bold to say that their clashing of opinions over the years has been analogous to such rivalries as Scorpion and Sub-Zero or Goku and Vegeta. Truly though, the great thing about both these opinions is that they are both very valid and intelligent, but only one can be correct. In the end, only time will tell, and the answer will surely reveal itself in the near future.

Contact the writer: michael.hanifin@scranton.edu

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