The oil industry, with its history of booms and busts, appears to be in the early stages of itslatest downturn.
The price of oil has plunged more than 55 percent to under $50 a barrel since June. That is thelowest price since the depths of the 2009 recession.
Oil analysts predict that the price could fall below $40 before beginning to rebound. But evenoptimists say $70 a barrel by the end of the year is highly doubtful.
Why is the price of oil dropping so fast? Why now?
This a complicated question, but it boils down to the simple economics of supply and demand.
United States domestic production has nearly doubled over the last six years, pushing out oilimports that need to find another home. Saudi, Nigerian and Algerian oil that once found ahome in the United States is suddenly competing for Asian markets, and the producers areforced to drop prices.
On the demand side, the economies of Europe and developing countries are weakening andvehicles are becoming more energy-efficient. So demand for fuel is lagging a bit.
Who benefits from the price drop?
Any motorist can tell you gasoline prices have dropped more than a dollar a gallon in recentmonths. Diesel, heating oil and natural gas prices have also fallen sharply. All together, theyrepresent the equivalent of a sizable tax cut — putting $1,000 or more in the pockets of theaverage family over the next year. Europeans and consumers around the world will enjoy similarbenefits.
Who loses?
For starters, oil-producing countries and states. Venezuela, Iran, Nigeria, Ecuador, Brazil andRussia are just a few petrostates that will suffer economic and perhaps even politicalturbulence. Persian Gulf states are likely to invest less money around the world, and may cutaid to countries like Egypt.
In the United States, Alaska, North Dakota, Texas, Oklahoma and Louisiana will face economicchallenges. Some smaller oil companies that are heavily in debt may go out of business,pressuring some banks that lend to them.
What happened to OPEC?
The price of oil, as with other commodities, goes up and down. And in the past the Organizationof the Petroleum Exporting Countries, known as OPEC, has frequently cut production to firm upprices. Iran, Venezuela and Algeria are pressing the cartel to do so again, but Saudi Arabia, theUnited Arab Emirates and other gulf allies are refusing to cut. At the same time, Iraq is actuallypumping more.
Saudi officials have said that if they cut production and prices go up, they will lose market shareand merely benefit their competitors.
They say they are willing to see oil prices go much lower, but some oil analysts think they aremerely bluffing.
Is there a conspiracy to bring the price of oil down?
There are a number of conspiracy theories floating around. Even some oil executives arequietly noting that the Saudis want to hurt Russia and Iran, and so does the United States —motivation enough for the two oil-producing nations to force down prices. Dropping oil prices inthe 1980s did help bring down the Soviet unio, after all.
But there is no evidence to support the conspiracy theories, and Saudi Arabia and the UnitedStates rarely coordinate smoothly.
And the Obama administration is hardly in a position to coordinate the drilling of hundreds ofoil companies seeking profits and answering to their shareholders.
When are oil prices likely to recover?
Not anytime soon. Oil production is still increasing in the United States and some othercountries. Many Wall Street banks are predicting that the oil price could fall as low as $40 abarrel in the coming months.
But production is likely to begin declining in the second half of the year, and then crude priceswill also begin to recover. The history of oil is a history of booms and busts followed by more ofthe same.
