Oil prices just sank to a new low. Here’s why that’s not as awesome as it sounds

GlobalPost
A woman prepares to fill up her vehicle at a gas station in California on February 9, 2015.
A woman prepares to fill up her vehicle at a gas station in California on February 9, 2015. 
Justin Sullivan

These are good times for American drivers.  

Oil prices fell to the lowest level since 2009 on Wednesday after the Energy Information Administration said American crude stockpiles unexpectedly rose by 2.6 million barrels last week, adding to investor concerns about oversupply in the market.

West Texas Intermediate crude, the US benchmark, was trading slightly below $41 a barrel, which is amazing when you consider that oil prices were hovering above $90 a barrel just a year ago.

Since June, prices have fallen around 30 percent.

Falling crude prices will translate into even cheaper outlays at the pump, which is a good thing for the many vacationers still driving around the country this summer.

But it’s not so great if you consider oil to be a barometer for global economic growth. Falling oil prices would suggest that the world economy is heading in the same direction. And it's bad news for climate change campaigners because it's much harder to get people to stop using fossil fuels when they are so darn cheap. 

One reason oil prices have fallen so much is China.

Traders are worried that the Chinese economic slowdown means one of the world’s biggest oil guzzlers won’t be needing as much crude as it did in the past. The recent swathe of weak data on the Chinese economy, the stock market crash and the central bank’s shock decision to devalue the country’s currency have only exacerbated those fears.

Yet it’s not just China. There is also growing apprehension about the economies of South Korea, Turkey, Russia, Brazil, Mexico, Japan … the list goes on. That is making investors even more jittery because slower growth equals weaker oil demand.  

Another factor weighing on oil is the strengthening dollar against other currencies. As the US economic recovery gathers pace, the Federal Reserve has indicated it would like to start raising interest rates in the coming months.

That is attracting a lot of demand for the dollar as investors anticipate getting better returns on dollar assets. But it also means greenback-denominated commodities, such as oil, are more expensive for commodity traders using other currencies, so they tend to buy less of the stuff.

But the major reason for the drop in oil prices is the global oversupply

The world is producing more oil than it can consume. You can partly thank the fracking-driven energy boom in the United States for that. No one, including members of the Organization of Petroleum Exporting Countries (OPEC) and US producers, appears willing to cut production for fear of losing market share. Everyone seems to be waiting for their rivals to turn off the tap first.

In the meantime, prices keep falling.

The looming end of the summer driving season in the northern hemisphere will exert even more downward pressure on prices in the coming months. 

 

Some predict prices could go as low as $15 a barrel, which might sound crazy. But maybe it's not. Back in July the International Energy Agency said oil prices could keep falling into next year. 

And the global glut of oil is expected to get worse following the Iran nuclear deal, which will lift crippling sanctions on the country and let more Iranian oil into the market. 

Which is what the world really doesn't need right now.