In the past year and a half, oil prices have dropped from $110 a barrel to less than $30. This is the lowest oil prices have been since 2004, according to the New York Times.
While most consumers — especially college students — are not questioning why it is cheaper to fill up their tank, the concept itself raises a number of questions: What do the low oil prices indicate for the local, national and global economy? What causes oil prices to dramatically shift? And what impact does low oil costs have on a university like Creighton?
Economics and Finance professor Ernest Goss weighed in on these questions.
According to Goss, fluctuating oil prices are the result of a number of factors. However, the recent drop is a matter of supply and demand.
“There has been a huge increase in supply,” Goss said. “This has a lot to do with oil production in the U.S. There is a lot of production that we didn’t use to have. North Dakota is now one of the top states in the U.S. in terms of oil production.”
In addition to this, Saudi Arabia, the largest oil producer in the world, continues to produce significant amount of oil, regardless the low prices.
“I think their intent is to drive the competition—like North Dakota—out of business because the cost of oil production is much lower in Saudi Arabia than it is in most parts of the U.S. They can still make a profit—less of a profit—but drive some of the U.S producers out of business,” Goss said.
Economic sanctions have recently been lifted off of Iran, and thus Iran will now be selling oil in the global markets. This adds to Saudi Arabians motive to produce because of the long lasting battle between the Sunni and Shiite branches of Islam. The majority of Saudi-Arabia is Sunni, and the majority of Iran is Shiite.
“There is an argument that the Saudis are not going to pull back on production because they want to punish or at least put a little redolence on the Iranians,” Goss said.
While parts of the U.S. are feeling the negative effects of the dropping prices, the U.S. oil sector is not as large as some countries. Oil producing countries experiencing the largest hit include Venezuela, Russia, Ecuador and Brazil.
“There is a lot of pain going on in the energy sector—the U.S. energy sector—the international energy sector. Venezuela has serious economic problems and they’re reeling economically and politically speaking. You could potentially have massive economic dislocations in Venezuela and all oil producing countries, including the U.S.”
As oil-exporting countries, drilling industries and investors are suffering; consumers, transportation, retail and utilities are reaping the benefits of the current oil market. Consumers, including students and faculty at Creighton, are able to buy more retail goods, pay off debt and do more traveling.
“For we at the university, this is a pretty good thing if you look at it selfishly. We all travel, both through airlines and with vehicles. We also must pay to heat the buildings,” Goss said. “Education is a beneficiary in this situation.”
For Arts & Sciences senior Brandon Warrington, the low oil prices have impacted his traveling decisions.
“I am going on a tour of law schools in March and rather than fly I am going to drive all the way to Detroit for the trip because with gas being cheap I can honestly buy gas for the entire trip for cheaper than the cost of a single flight from Omaha to Detroit, ” Warrington said.
As for when to expect the price of oil to go back up, Goss said no one really knows for sure.
“I expect it to go back up, but how much is the real key. Right now I don’t see oil going back to about 100 dollars a barrel in 2016 or perhaps even 2017. I could see it going back above 50 but that’s not likely either. I think my economic crystal ball would say it’s going to be a tough year for oil, which means it’s a good year for we consumers.”