Surname 1

Name

Professor’s name

Institution affiliation

Date

The Great Plunge in Oil Prices: Causes, Consequences and, Response

The decline of oil prices began in the late 1990s with a marked decrease by half since the year

2014. The drop in the oil prices was greatly brought about by the increasing demands for the

upcoming markets and the lowering of the investment on the market commodities. One of the

remarkable declines of oil prices happened in the period between June 2014 and January 2015

which recorded the third highest decline from the past three decades. The aspect of supply and

demand played a vital role in the great decline besides the other three major elements. The global

and political spillovers, a significant change of the policies and objectives of the OPEC and the

appreciation of the U. S. Dollar were the key roles that culminated to this great plunge (Kraus).

The current oil price which was trading at $33 per barrel of the Brent crude is now trading at $29

per barrel.

The figure below shows the decline of oil prices from the year 2006 up to 2015 marking the

sharpness of the decrease.

 Surname 2

Causes

The increase in the domestic production over the years compelled the government of United

States to venture other sources of the black gold in countries like Algeria, Saudi Arabia, and

Nigeria in order to keep up with the competition posed by the markets in Asia. This economic

shift has directly forced the oil producers to drop their oil prices regarding the emergent of oil

exports from various countries like the Russians, Iraqi and Canada. Despite the expansion of the

market for oil, a drop in production has been recorded due to the decline in the investments for

exploration. The economic shift has increased the demand for oil in Europe and developing

countries with their increase in demand for energy. However, this matter has directed the

acquisition of the product from offshore Gulfs of Canada and Mexico (Kraus).

Consequences and effects of the plunge

The decline in the oil price has a direct influence on global growth and inflation. Oil products

consumers and small income earning groups of individuals are roughly disoriented by the drop in

oil prices forcing them to plan on a higher budget beyond their capability. The most

disadvantaged group of this economic phenomenon are the oil-producing countries with some of

them plunged by political instability (Kraus).

 Surname 3

The figure above shows the supply and demand curve for the global oil price. The decline in oil

production from the producing countries increases the demand for oil globally.

Sanctions on other countries like Iran and Pakistan by the Western nations have also led to the

decline of oil production significantly. For instance, Iran’s oil production dropped by one million

barrels per day in the past years of their production. The drop in oil prices has its devastating

effects felt in the United States having left with no profitable wells that can be sunk. Economic

challenge has also struck many states like Texas, Oklahoma among others. The giant pioneers of

oil exploration and merchandisers like the Chevron, Shell and, BP are also not spared by the turn

of events. The companies have been forced to suddenly reduce their payrolls in order to maintain

a healthy profit margin (Kraus).

 Surname 4

The decline in oil prices stretched its effects to international organizations like the OPEC where

it has been compelled to cut oil production to stabilize the global price. Nations like Algeria,

Venezuela, Iran, and Ecuador were the center of a dispute in the organizational policies. This has

resulted in oil-rich countries like Saudi Arabia, Qatar, Russia, and Venezuela to denounce the

motion in February 2016 to cut their current output levels. The defection of Saudi Arabia from

OPEC policies translated to a significant drop in oil prices in the nation and subsequently

slipping in financial constraint (Kraus).

Conclusion

In conclusion, the decline of oil prices directs a plunging pressure on the price of other

commodities like natural gas, food, and fertilizers. The drop in oil prices significantly shifts the

financial and monetary policies, especially in the oil-producing nations. The drop of oil prices

also causes the shift of energy production to environmentally friendly sources like solar, wind

turbines and nuclear energy as a way of reducing poverty levels and creates a sustainable global

economic growth (Kraus).

 Surname 5

Work Cited

Kraus, Clifford. "Oil Prices: What’s Behind the Plunge? Simple Economics." NY Times (2016).

http://www.bp.com/en/global/corporate/about-bp/energy-economics/statistical-review-of-world-
energy/review-by-energy-type/oil/oil-production.html