As you may have heard, the oil industry has struggled over the past couple of years, with the price of oil crashing from over $100 USD per barrel to just over $26 USD.
Along with the news of price dropping at an accelerated rate, companies have stopped exploring for new oil, halted production, or gone completely bankrupt in the oil industry.
This article will explain some of the reasons for the oil price crash as well as what to expect in 2017.
Factors contributing to the oil crash of 2015-2016
• A strong US Dollar
• Drilling Technology Development
• Supply and Demand
• Profit Margins
It is no secret that the dollar has increased in strength compared to other foreign currencies.
When it comes to commodities, a strong dollar will cause a drop in commodity prices, so not only is the price of commodities falling, including oil, but the dollar was performing well against other foreign currencies. Because oil is valued in dollars, the international of trading of oil became harder for foreign producers as well as foreign buyers of oil because their currency was not giving them the same value in oil as it had previously.
This became a double-edged sword and compounded to drive prices down at a high rate.
No matter what industry, technology is something that grows exponentially every day.
The printing press revolutionized how books were mass produced, telephones went from corded to wireless bricks, to the sleek phone you are probably carrying in your pocket or reading this article on. All that has happened in just a few short years.
The same has happened in the oil industry.
The technology has increased in the drilling process to produce such a large amount of oil, and it is the increase of technology that has created an oversupply of oil. When there is too much of anything and demand cannot catch up with total supply, the price drops, and this is what has happened with oil on an enormous scale.
Supply and Demand
The basic economic rule of supply and demand had a huge impact on the oil industry over the past few years.
The rule of supply and demand shows that when there is an over-supply of a product, there will be a lower price to increase the demand and bring the supply down. This works in an inverse way as well.
Many factors contributed to the oversupply of oil. Technology made oil more easily available. The increase in the US dollar made traders less likely to buy as much oil. Foreign countries tried to create more barrels to sell to make up for the loss in price per barrel, which drove prices down further.
Because prices started falling so quickly, and to such low levels, many companies had to make cuts to their oil exploration, drilling or had to file for bankruptcy. This leads to our final point of profit margins and why some of these large oil producers went out of business during this time.
In business, the higher the profit margin, the more money a company will make.
In the oil industry, the higher the price of a barrel of oil sold compared to the cost of producing that same barrel of oil with being the profit made off that sale of the barrel of oil.
When a barrel of oil cost over $100 USD, it was much easier for a company to make money, and oil fields were profitable at the cost of $50 USD. When oil suddenly dropped to $26 USD, that same project started losing $25 USD per barrel instead of making $50 USD per barrel. When this is multiplied out to hundreds and thousands of barrels per day, it is easy to see how companies started filing for bankruptcy and going out of business. They could no longer make a profit in many of their oil projects.
Where are we today?
Surprisingly, this is not the first time that this has happened in the industry.
Sharp drops in oil prices have occurred in the 1980’s, 1990’s, and in the late 2000’s. The industry has always bounced back.
The same is happening now.
Oil prices have doubled over the past year, showing signs of recovery and bringing back some stability to the industry. With the signs of recovery, if you are looking to get into commodities and the oil industry, this could be a great time to do so.
If you had invested when the price per barrel was down to $26 USD, you would have already over doubled your money today. With so many different countries and their economies relying on the oil industry, the industry has high upside moving forward into 2017.
Our final part of our oil series will focus on oil investments and how you can participate in the oil industry, something that many American citizens would love to be a part of. WTC-SF has partners that have established oil projects with such a low cost to produce their oil; they MADE MONEY during the downturn.
The information in this article is meant for general information purposes only and should not be taken as legal advice. Please consult an immigration attorney for your specific immigration needs.