Since the 1970s, great advances in oil extraction have caused oil prices to fall. Not only this, but improvements in automobile design, shifting towards leanness and energy efficiency, have also contributed to this trend. From 2005 to 2011, when the GDP of the US increased by almost $1trn, oil consumption decreased by over 2 million barrels per day. Startlingly, though American GDP is now $6trn higher than in 2005, the US consumes less oil than it did a decade ago. But what can explain this?
Globally, 34 billion barrels of oil are consumed each year. When the barrel price of oil falls by a mere $10, this can result in a price shift of $340bn from producers to consumers. Following this, last August’s $60 price decline redistributed a staggering $2trn in savings back to oil consumers. Clearly, falling oil prices benefit net importers of oil. Any country that consumes more than it produces will gain from these changes.
The major global recessions of the past 50 years have been preceded by a sharp increase in oil prices. In 2007, in the year before the Global Financial Crisis, the price of oil almost tripled, from $50 to $140. When prices collapse, however, the story is different. Even the prices of other commodities and industrial metals increase after an oil price collapse. In 1986, after oil prices fell by 50%, the prices of metals doubled.
The income disparity between importers and exporters goes some way towards explaining these trends. Oil consuming countries spend extra income quickly, whereas oil exporters maintain public spending, and add significant funds to their sovereign reserves. One such example is Saudi Arabia. The effect of lower oil prices is positive for global growth. The IMF has projected that the recent fall in oil prices should boost 2016’s global GDP by 0.5-1%.
Many recent developments have helped to accelerate the decline in oil prices. The shale boom in the United States and its innovative extraction methods have made oil easier to obtain. Known as ‘octopus wells’, as many as 18 horizontal shafts can tap multiple separate pools from a single vertical hole. It is undeniable that the shale revolution has changed the oil industry irrevocably. As advances continue, more oil wells will become accessible, and production is set to increase further.
