What it Means for You That Oil is Down by Half

The price of a barrel of oil fell by half between June 2014 and December 2014. This decline intensified after OPEC leaders decided not to cut production to try to squeeze the profits of American oil companies. Whether the strategy is successful remains to be seen, but in the short-term, lower oil prices will positively impact for the typical consumer.

Manufacturing.net reports oil prices dropped for the simple reason that supplies were up and demand was down. American oil companies have increased production by 70 percent since 2008, topping out at 3.5 million barrels of oil per day. The incremental oil alone is more than the total daily output of any OPEC member other than Saudi Arabia. This is partially due to turmoil in Libya and Iran, which reduced Middle Eastern production just as America's shale oil boom began.

OPEC predicts demand for oil will dip to a 10-year low in 2015. It has dropped in recent years, especially in the United States, thanks to better automobile fuel efficiency. Although the demand for gasoline is predicted to increase in 2015, it is not expected to rise enough to make a significant difference in overall oil consumption.

Lower gasoline prices should create a win-win situation for the American economy. For both businesses and consumers, lower oil prices will mean more spending money in peoples' pockets. As of December 2014, gasoline prices in some areas were below $2 per gallon for the first time in five years. The savings trickle down to manufacturers as shipping products becomes less expensive. Airlines will spend less money on jet fuel, logistics companies will save on diesel and consumer prices will trend lower while company profits rise. The price drop occurred in time to benefit millions of holiday shoppers in the United States looking for great deals on holiday gifts.

Countries such as Saudi Arabia, Russia, Iran, Venezuela and Libya may have to cut their government spending due to reduced oil prices. States including Texas, North Dakota, Oklahoma and Alaska may also see budget shortfalls due to declining revenue for oil companies. However, these companies can mitigate this impact by exporting products if prices become low enough. Plus, the overall U.S. economy is not reliant on oil profits.

When oil prices go down, demand for other products rises because companies are spending less on fuel costs. The unexpected 3.5% growth in the U.S. GDP in the third quarter of 2014 indicates the global economy is continuing to improve following the recession of 2008. And lower energy prices are the perfect catalyst for an expanding economy.

Lower oil prices in 2015 will mean American companies can afford to invest money in other areas. If lower costs at the gas pump continue, the U.S. economy will benefit as the country becomes increasingly independent of politically-based price fluctuations from the Middle East.

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