Global and U.S. oil prices tumbled sharply to four-year lows on news that the oil-producing cartel OPEC opted not to cut production, raising the prospects of a world oversupplied with crude for the foreseeable future.
The price for a barrel of West Texas Intermediate crude, the U.S. oil reference price, fell $7.70 to $65.99 in post-Thanksgiving trading Friday on the New York Mercantile Exchange, a dizzying drop considering it was above $100 a barrel over the summer.
The oil cartel decided Thursday to leave its production target of 30 million barrels per day in place.
The price plunge signals even lower gasoline prices for U.S. consumers, who enjoyed the cheapest Thanksgiving travel period in five years. A gallon of regular unleaded gasoline averaged $2.792, the AAA motor club said Friday, compared with $3.034 a month earlier and $3.283 a year ago.
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OPEC’s hold-the-line approach, allowing for an oil glut, amounts to a high-stakes game of chicken. Here are some answers to questions about the road ahead.
Why is OPEC’s move a game of chicken?
Falling oil prices hurt oil-rich nations such as Iran, Russia and Venezuela, but they also hurt the U.S. oil industry, which has hit record daily production exceeding 9 million barrels thanks to technological developments that allow oil trapped below shale deposits to be drilled. Rather than lower production to make oil supplies tighter and push up prices, OPEC, led by Saudi Arabia, seems intent on a game of mutual harm. Saudi Arabia wants U.S. producers, who don’t belong to any cartel, to share the pain of any cuts.
Is this a temporary action by OPEC?
That’s the $1 million question. For now, analysts expect prices to fall further.
“It’s obvious that the market is convinced that OPEC is going to continue to flood the market with oil,” said Phil Flynn, a senior energy analyst with the Price Futures Group. “The market is going to be in for a long slog.”
What do low oil prices mean for bigger oil companies such as Exxon Mobil and the like?
If the stock market is any indication, the near term is not bright for energy stocks. Share prices for Exxon Mobil fell 4.2 percent Friday in a shortened trading day. Chevron’s stock fell 5.4 percent. As a sector, shares of oil exploration and production companies fell 8.43 percent Friday, a sign that Wall Street is frowning on their near-term future and fretting over economic fallout from a downturn in a job-creating sector.
“The U.S. oil boom has really been a boon to our economy. It’s created a lot of jobs,” Flynn said. “But if it’s under threat, it could hurt our [economic] growth down the road.”
Consumers want low prices; what’s the problem?
Sharp price swings up and down are problematic. If the price drops too far, say in the $50-a-barrel range, it will become too costly to extract oil from the ground for some U.S. producers. They’ll lay off employees, and eventually they’ll be forced out of the market. The reduced supply that follows will create a self-correcting rise in prices.