What will oil producers do?

To drivers’ delight, gas prices have dropped to around $3 a gallon. Many thought this day would never come. N.C. State University economist Mike Walden explains why the drop happened and whether lower prices will continue.

“Gas prices of course, are directly tied to oil prices. So the real question is, ‘Why have oil prices gone down?’ They have gone down from about $120 a barrel just recently to about $80 a barrel now. And that’s because of the increase worldwide. Number one in supply, for example, the production of oil out of the U.S. has gone up 50 percent. And … we’re now on the verge of being the largest oil-producing country in the world. Also, demand is still increasing. But the increase for demand has slowed, particularly in countries like China.

“So this is the reason why we’re seeing low gas prices – because of oil prices.

“Now, there’s a catch here that some are questioning: If oil prices go down too much will suppliers begin to cut back? And I think that hinges on two issues:

“One, for example here in the U.S., what is the lowest level of oil prices that will continue to motivate suppliers to produce the supply they are doing? Many think it’s maybe around $50 a barrel. So as long as we don’t get below $50, we’re O.K.

“And the second question is, ‘What will Saudi Arabia do?’ Saudi Arabia is still the key player in the worldwide oil market. They have increased and decreased supply over the years to meet their own economic and political conditions. It is thought they will continue to pump because they see the low oil prices as a plus for hurting one of their arch enemies – Iran.”

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