Why oil prices are falling, and what that means for the economy

Oil prices have fallen nearly half from around $110 per barrel in June to about $59 per barrel on Friday. Experts warn that the oil industry could be in serious trouble if prices remain too low.

Although Citibank analysts estimate that the oil market is already oversupplying about 700,000 barrels of oil per day, according to Bloomberg Businessweek, the Organization of Petroleum Exporting Countries (OPEC) decided last month to keep production levels at 30 million barrels per day despite falling oil prices, putting further downward pressure on the price of oil.

Oil prices rose in 2009 and stayed around $100 per barrel after 2010. China’s booming economy had increased demand for oil, while conflicts in oil producing countries like Libya kept supplies low.

High oil prices prompted American companies to begin using hydraulic fracturing and horizontal drilling technologies. The success of these technologies increased supply, which helped drive down oil prices. Reduced global demand for oil due to weakened economies in Europe and Asia coupled with a stronger U.S. economy made oil, which is priced in dollars, more expensive for most countries in real terms, Bloomberg reported.

Lower oil prices drive down commodity prices and gas prices because they lower production costs. Oil importing nations such as Japan, South Korea, China, India and Germany stand to benefit from the lower oil prices.

However, continued low oil prices would eventually lead to the shutting down of drilling projects and related businesses, leading to job losses. And oil exporting nations such as Russia, Iran, Saudi Arabia and Venezuela would be hard hit by continued low oil prices.