From 2010 to 2014, oil prices were steady at around $110 a barrel, while just last week Shell’s Finance Director, Simon Henry, predicated oil to drop under $20 a barrel. West Texas Intermediate hit $32.24 a barrel and is trading at a minus 11% for the year. Even some independent producers, Apache and Southwestern Energy are trending down. Forty American and Canadian oil companies filed for bankruptcy protection in the last year. Prices are down across the board and over 200,000 oil workers have lost their jobs. Simply put, the demand for oil is down across the world. Developing countries are slowing down and production across the world is still high.
Russia and Saudi Arabia have not slowed refineries to try to boost prices and oversupply will continue to hold down prices. It is also worth noting that fracking has increased output significantly. The consumer has obviously benefited and this has been well publicized, but oil-dependent states like Louisiana, Texas, Alaska, and North Dakota are feeling the pressure. Alaska currently has a hiring freeze on government jobs and the Governor is proposing the first state income tax since the 1980s.
Disruptive innovation and internet technology have been blamed in accelerating oil-dependent institutions $2.9 trillion plunge. The economy has tanked before due to rising oil prices (1973-75, 1980-81, and 1990-91), but it’s rare to see an oil surplus cause a slowdown. However, in a slowing economy, it is very common to see debt repayment to become increasingly difficult.
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