A Cursory Explanation of Falling Oil Prices

Because I am neither an economist nor a geopolitical expert, I can not claim to give you the full rundown on why, exactly, this exciting price of oil free-fall is occurring. For the sake of brevity, I will do my best to summarize what has been the strangest and most surprising economic event to occur in (my) recent memory.

Indeed, it would seem that everyone is baffled by the recent price of oil across the United States. With prices dipping below two dollars in many states, shouts of Christmas miracles and the impending return of Quetzalcoatl are tempting. But behind every miracle is a logical collection of data and an asshole to explain it to you. I accept the mantle gladly and willingly.

On the surface, there is an obvious (albeit incomplete) reason for our sub-$2 gas range. You see, where once we relied heavily on other countries for our oil, the United States has (gradually) become one of the largest producers of oil in the world. That's right! We've drilled our way into the big leagues and our shale-oil cup overfloweth with more gas than we know what to do with. But with great power comes.....well, no responsibility. As a non-member of OPEC, we really aren't obligated to play by their rules and adhere to their needs, letting us give them the oil-doused finger and laugh our way to the bank.

Of course, we aren't just hurting big oil with our antics. We're also effectively crippling the economy of those countries that rely on oil production for their livelihoods. With Russia's currency losing "half its value against the US dollar in 2014" it's clear that we are about to make a lot of powerful players very desperate. But that's conjecture and I don't like to deal too much in that.

Also conjecture, however, is the entire notion that our shale production is wholly responsible for the falling prices. It would, of course, be insane to dismiss it entirely, but it plays a much smaller part than seems initially evident. It's worth noting that we didn't just suddenly start producing shale-oil this year. It's been a process several years in the making. Why are prices only just now falling? According to Mother Jones (quoting James Hamilton), that can be rather simply attributed to reduced demand. Seems rather obvious now that you think about it, but it's a significant aspect of the whole ordeal.

Oil is what economists like to call "price-inelastic," which means that demand is not easily affected by a change in price. Obviously, people still need to get to work and visit family and go out for a midnight snack. In other words, lazy Americans are going to drive regardless of the price and bitch about it later.

So why is demand down? 

I'm glad you asked! I also asked (read: Googled) this question and was brought to a lovely little article in The Economist that sums up these questions and more. In short, demand is down due to "weak economic activity, increased efficiency, and a growing switch away from oil to other fuels." This is, of course, merely one in a laundry list of reasons including turmoil in Iraq and Libya and some weird wheelings and dealings amongst the Saudis and their Gulf friends, but I felt it was the most explicit answer to the persisting question of: what in the hell is going on with the price of gas?

Hopefully, it's evident to you that I have barely scratched the surface on this entire thing and I do urge you to research much further should you want to learn the nitty-gritty details. Besides that, I hope I've enlightened you just a tiny bit on the state of oil prices, and now you have a fun little list of articles that you can use to educate your friends! Just please don't be a pretentious asshole about it.