Oil Prices Drop 18% to below $59 a Barrel,
Easing Pain at the Pump, but No Drop in Oil or Gas Price in India
Oil prices have fallen sharply this year
as the global supply has remained strong and demand has been slow to grow.
Overview
U.S. oil prices have fallen sharply this year — down
about 18% to below $59 a barrel — as global supply outpaces demand,
providing consumers some relief from inflation but squeezing American oil
producers.
At current levels, many companies say it no
longer makes financial sense to drill new wells, prompting rig shutdowns,
layoffs, and spending cuts across the energy sector.
Causes of
the Price Drop
·
Global oversupply: Oil
production in the U.S. and OPEC+ nations has outpaced consumption.
·
Geopolitical easing: The Israel–Hamas
cease-fire reduced fears of supply disruption from the Middle East.
·
Trade tensions: Escalating global trade
frictions have dampened expectations for economic and fuel demand growth.
·
Prices briefly rebounded toward $60 after
Treasury Secretary Scott Bessent signaled new
U.S. sanctions on Russia.
Consumer
Relief vs. Industry Pain
·
Gasoline prices: Regular gas averages $3.07
per gallon, down 3% from last year ($3.16), according to AAA.
·
Consumer benefit: Lower
fuel prices are one of the few bright spots for Americans amid persistent
inflation in food, cars, and electricity.
·
Industry strain:
o
Drilling activity down 13% year-on-year
(Baker Hughes).
o
Chevron and ConocoPhillips among
firms announcing major job cuts.
o
Employment in oil and gas down 3% this year
through July (BLS data).
Production
Outlook
·
U.S. crude output hit a record 13.6 million
barrels per day in July but is now likely to plateau or fall.
·
“Activity level has now fallen to a place where it
would be very difficult to sustain current production,” said Ron Gusek,
CEO of Liberty Energy.
·
Analysts warn that if prices remain below $60 for
long, rig closures and layoffs will accelerate.
Economic
and Policy Impact
·
Mixed effect: Lower oil prices still slightly
benefit the U.S. economy, but less so than in past decades now that the U.S. is
the world’s largest oil producer.
·
Tariff pressures:
o
Trump administration tariffs have raised
material costs for drillers.
o
Steel pipe prices used in
wells are up 17% year-over-year (J.P. Morgan).
o
Gusek noted: “Tariffs make life more expensive for
all of us… every dollar matters in this environment.”
Analysts’
View
·
Jesse Thompson (Federal Reserve Bank of
Dallas): “The lower price has to stick around a while for it to really hit the
oil field.”
·
Chris Lafakis (Moody’s Analytics): “It’s still
a positive when oil prices decline, but much less of a positive than it used to
be.”
Bottom
Line
Falling oil prices have brought short-term relief
to consumers but are threatening the health of the U.S. shale industry,
which faces rising costs, weaker demand, and political pressure to keep
production high.
If crude stays below $60 a barrel, analysts warn
that the next few months could bring deeper cuts in investment and
employment, even as drivers enjoy cheaper gasoline.
The
price of oil has dropped to some of its lowest levels of the year, making it less
expensive for Americans to fuel their cars, but further straining U.S. oil companies,
which have been idling drilling rigs and shedding thousands of workers.
At
less than $59 a barrel, U.S. oil prices settled on Wednesday about 18 percent lower
than they were at the end of last year. That is low enough that it no longer makes
financial sense for many companies to drill new wells.
The
main reason for the drop is that global oil production has been growing more quickly
than demand.
The
recent slide below $60 a barrel came this month, after Israel and Hamas agreed to
a cease-fire, alleviating concerns that Middle East conflicts would disrupt the
flow of oil. At the same time, heightened trade tensions have weighed on expectations
for economic growth worldwide and, thus, demand for fuels.
Prices
climbed back toward $60 a barrel late Wednesday after the Treasury secretary, Scott
Bessent, said the United States was planning new sanctions on Russia.
Oil
is one of the few things that have become cheaper this year, providing consumers
a rare bit of good news on the inflation front. Many other goods and services, including
food, cars and electricity, have become more expensive while hiring has cooled.
Energy
prices figured prominently in the 2024 presidential campaign, and President Trump
has urged Saudi Arabia and other big oil producers to help drive down prices. But
lower prices will undermine another of the administration’s aims — to greatly increase
domestic oil production.
If
prices remain around these levels for a long stretch or if they fall further, as
many analysts think is likely to happen, the U.S. oil industry will be hard pressed
to keep growing.
Oil
had been hovering between $60 and $70 a barrel for much of the year, lower than
many companies would prefer but not enough to dent production. U.S. output climbed
to a record 13.6 million barrels a day in July, according to the Energy Information
Administration.
That
run is likely just about over, oil executives said.
“Activity
level has now fallen to a place where it would be very difficult to sustain current
production,” Ron Gusek, the chief executive of the fracking company Liberty Energy,
said in an interview.
For
decades, cheap oil delivered a huge economic boost to the United States. But now
that the country is the world’s top oil producer and more energy efficient, that
equation has become more complicated.
Lower
oil prices generally mean cheaper gasoline, which now costs $3.07 for a gallon of
regular, down about 3 percent from this time last year, when it cost $3.16, according
to the AAA motor club. But inexpensive fuel also hurts companies that are big employers
and taxpayers in states like Texas and North Dakota.
“It’s
still a positive for the U.S. economy when oil prices decline. But it’s much less
of a positive than it used to be,” said Chris Lafakis, the director of economic
research at Moody’s Analytics.
Analysts
and other industry observers have worried all year that the world was pumping more
oil than it needed. In addition to the United States, the OPEC Plus oil producers group, led by Saudi Arabia, has been ramping up output.
Lower
prices have dented oil company profits, which have begun to fall from the very high
levels of recent years. That has added pressure on executives to cut spending.
There
are about 13 percent fewer rigs drilling for oil in the United States than there
were a year ago, according to Baker Hughes, an oil field service company. Chevron,
ConocoPhillips and other oil companies announced deep job cuts even before the recent
slide below $60 a barrel. Employment in oil and gas production and related services
was down 3 percent this year through July, according to the Bureau of Labor Statistics.
Higher
prices for natural gas, which often comes out of the ground with oil, have helped
blunt the negative economic effects of lower crude prices.
But
more layoffs and other spending cuts are likely if prices remain below $60 through
the end of the year, Jesse Thompson, an economist with the Federal Reserve Bank
of Dallas, said in an interview last week.
“The
lower price has to stick around a while for it to really hit the oil field,” Mr.
Thompson said.
A
big challenge for the industry is that oil prices have been falling at the same
time that Mr. Trump’s higher tariffs have made key materials used by the industry
more expensive. The steel pipe that companies use to line oil wells, for example,
cost 17 percent more in September than it did a year earlier, J.P. Morgan analysts
wrote in a recent note to investors.
“Putting
tariffs on doesn’t reshore things in the near term. In the near term, it only makes
life more expensive for all of us,” said Mr. Gusek, whose predecessor at Liberty,
Chris Wright, is now Mr. Trump’s energy secretary. “In a very challenged operating
environment, every one of those dollars matters.”