Oil prices have declined sharply over the last six months, with the U.S. benchmark closing below $50/barrel on Jan. 6th, for the first time since 2009. A number of factors have contributed to this fall in prices, including an increase in U.S. tight oil production and decreased global demand. Beyond the immediate financial benefits of lower fuel prices for U.S. consumers, the falling price of oil raises several policy questions. Impacts on financial markets and geopolitical tensions that could be exacerbated if the low price persists are only a few of the potential issues U.S. policymakers may find themselves dealing with.
There is also great deal of speculation about how falling prices will impact U.S. oil producers. The Organization of Petroleum Exporting Countries (OPEC), led by Saudi Arabia, has chosen to utilize their influence to maneuver for market share rather than support higher prices. Made possible by very low production costs ($10-$25/barrel), this move is widely viewed as attempt to undercut existing and future investment in U.S. production. As a result, some have suggested that U.S. benchmark prices could dip to $20/barrel.
It’s important to note that eight U.S. states are heavily dependent on energy production for revenue and could face serious challenges if low prices persist. Further, the debate over crude oil exports has taken an abrupt turn, signaling how falling prices have changed the policy landscape.
How low will oil prices go and for how long? What are the most important policy implications of falling oil prices? Are low oil prices good for the U.S.?