oil rig

Oil prices have been declining since early April. A slowdown in worldwide economic activities has reduced oil demand, thereby resulting in a sharp decline of oil prices. The signs of slowdown are already visible: The US economy is going through a rough patch, the Eurozone  has had over twenty summits with no result,  and China’s projected growth rates have plunged to the lowest level in two decades.

During the 2008 economic crisis, Brent oil prices had fallen from $146/barrel in July to $36.6/barrel in December. Should we expect another collapse in oil prices? The national average price of oil in the US has fallen from $3.93 a gallon to $3.54. The primary reason of decline is that people are buying less fuel, but producers continue to increase the output.

Oil Supplies are Rising

Despite the falling consumption, the production of oil in OPEC nations increased 40,000 barrels per day since January this year to 31.75 million in May.

“The number that really matters is the jump from January to May this year, which shows that OPEC output rose from 30.87 million barrels a day in January to 31.75 million barrels a day last month,” said John Kingston, Platts global director of news. “This has occurred even as Iranian supplies were being squeezed by a drop in the number of customers willing to take its oil. We can now assume OPEC members at least will discuss at their upcoming meeting a possible paring of production. This scenario was almost impossible to fathom just a few months ago, as OPEC continues to surprise the world with its ability to put oil on to the market.”

A Relief to American Consumers

The import prices will likely further decline as every oil producer is trying to sell its oil in the US, a market where there is still some demand. Therefore, they are likely to accept lower prices in order to maintain the sales. The news of declining gas prices will make American consumers as well as President Barack Obama happy. Consumer spending on other goods will be higher, and Obama Administration can take a sigh of relief. Many had blamed the administration for rising price of gas costs not too long ago.

However, any decline will be temporary. In the long run, gas prices will continue to soar because the earth has a limited amount of oil and the growth of middle class around the world will ensure increased demand.