The Collapse of Global Oil Prices in Mid-2014: US Case Study
Introduction
The global production of oil as an economic activity supporting several economies around the world is an ancient practice that gained popularity at the advent of fossil-driven engines. Oil is a major income earner among exporting countries and largely influences the economic growth of the exporters and importers a like depending on the market prices. The world experienced a global slump in oil prices beginning July 2014 occasioned by a confluence of unfavourable factors (Mead and Stiger, 2015). The drop in oil prices for a period of almost two years largely influenced the global economic growth rate due to the intensive reliance on petroleum products around the world.
The drop in oil prices in mid-2014 largely benefited consumer countries that had to access the commodity at an unusually low cost while hurting the producers who had to sell oil at an abysmal price. Voigt et al. (2015) note that the drop in oil prices in the middle of 2014 was the lowest the oil industry had endured for more than four years. The producing countries thus had to seek alternatives of taming the situation to help remain economically productive as they heavily relied on oil proceeds for economic growth. The dangers of abnormal drops in oil prices include the inability of oil-reliant countries to finance their fiscal budgets, a phenomenon that can lead to economic and political crushes. Large petroleum producers such as the United States heavily felt the impact of the slump in oil prices either directly or indirectly. According to Voigt et al. (2015), the US is a Superpower concerned about the welfare and stability of various countries, hence, any negative effects affecting oil producing or consuming countries due to the drop in prices equally affect it.
Background
Prior to the collapse of oil prices in mid-2014, the rates had been on a steady rise for a period of one year, hence, the collapse caught many industry players off-guard. The anticipation for price recovery never paid off as the prices kept worsening for almost two years. Mead and Stiger (2015) note that the increase in oil prices prior to the 2014 slump had been occasioned by upward pressure exerting forces such as increased economic growth rates in China and the United States in addition to the decline in interest rates in various countries. The rise in economic growth in the United States and China automatically creates market attractive ripples because these are the world’s two leading economies.
Hamilton (2012) argues that oil production and sale should be factored through an economic lens that minds the welfare of future generations, which may never come to directly enjoy the proceeds of the resources due to their exhaustive nature. In his analysis, Hamilton (2012) notes the prices of oil should be viable to help ensure the commodity’s productivity transcends to future generations through its positive economic impact in a country. Production of oil in the United States started in the 1850 and has been in progress since then, experiencing price fluctuations at varied economic seasons (Hamilton, 2012). The drop and rise in global oil prices ought to favour both the producing and consuming countries to help enhance viable economic growth in both settings. An unsustainable drop in oil prices badly injures the economic productivity of producers who heavily rely on the commodity for financial support, leading to disruptions in the financing to such countries’ sectors.
Low oil prices affects the US economy negatively as an oil producer in addition to negatively affecting the country’s oil producing companies that have to restructure their operations in addition to laying off workers due to the onset of untenable economic times. The US as a Superpower endured a heavy effect of the slump in global oil prices, as it had to contain the resultant effects of the economic downturn in producing countries that had to deal with moments of stagnant economic growth. The inability of countries to meet fiscal budgets due to the failure of the oil industry brought about issues like insecurity as youths got unemployed and engaged in terrorism and other criminal activities (Vogit et al., 2015).
In analysis of the impact of the collapse of the oil market, Husain et al. (2015) note that the most important thing is to examine the causes and draw recovery strategies to help regain normalcy. However, the forces behind mega economic crushes such as the one witnessed in the oil industry in 2014 may require input of several international actors, hence, the efforts of big economies like the US may not be sufficient in spearheading recovery. Thus, countries of influence need to come together at such crucial times to draw recovery guidelines. The existence of cartels in the global oil industry play an integral role in undermining recovery efforts from catastrophes such as this one prompting the need for main players like the US to act swiftly to help restore order in the industry. The United States heavily relies on oil both as a consumer and a producer, hence, was affected by the collapse in oil prices.
Through this research, stakeholders in the oil industry in the United States will understand the causes and effects of the slump in oil prices on the global stage as from the middle of the year 2014 to the US economy. The study will help draw recommendations on how best such a scenario can be avoided in the future in addition to helping the US cope with any adverse effects of the drop in prices that could still be existent today. The study uses a qualitative approach to help undertake a detailed analysis of what really happened during the period of unsustainable oil prices to producers.
The United States being the world’s Superpower was largely affected by the sudden drop in oil prices both directly and indirectly, hence, will be an important case study. Through this study, guidelines will be developed on the impact of the drop in oil prices to the US and beyond while recommendations will thus help mitigate a similar situation in the future.
Literature Review
According to Stavins (2015), the 2014-2015 sudden drops in global oil prices were blessings to consumer countries that experienced a trickle-down effect from the decrease in oil prices. The producer countries on the other hand to put up with tough economic times due to excessive reliance on oil proceeds to help finance their fiscal budgets. Stavins (2015) argues that the world and most particularly consumer countries ought not to have celebrated the crush in oil markets because they posed a major threat to the advancement and sustainability of renewable energy efforts around the world. The use of fossil fuels is responsible for the proliferation of global warming and environmental degradation, hence, the need to adopt large-scale clean energy efforts to help assure the sustainability of planet earth for future generations (Stavins, 2015).
The collapse of the global oil market was attributed to the decrease in demand from major importers such as the US and China in addition to the slow economic growth in Europe and other parts of the world (Mead and Stiger, 2015). The 2014-2015 oil industry phenomenon brought forth direct economic and political effects to the affected nations as countries failed to realize economic growth while others faced political upheavals resulting from macro-economic issues such as rise in level of unemployment (Voigt et al., 2015). According to Stavins (2015), the demand for fuel-efficient vehicles dropped drastically in the United States as people preferred to use guzzlers because the cost of fuel was largely affordable. The US equally had to endure a decline in demand for bio-fuels that help enhance environmental sustainability though policy restrictions had to sustain the bio-fuel industry.
Oil manufacturing companies in the United States and beyond had a rough time in the industry as they had to put up with unsustainable operations due to the sharp decline in oil demand as the price per barrel collapsed from $96 per barrel in the middle of 2014 to a meagre $44 in March 2015 (Stavins, 2015). The collapse in global oil prices is however noted to have originated from market disruptions occasioned by the existence of strong cartels in the oil industry. According to Morriss and Meiners (2013), the organization of oil petroleum exporting countries (OPEC) has strong cartels designed to exert upward pressure of the prices of oil to help increase their revenues. The market operates under the control of these cartels and any inefficiency in their operations leads to a collapse in the oil market leading to a dire situation like the one witnessed in the tear 2014.
The cartelization of the global oil industry inhibits the success of free market forces in the oil industry leading to a failure of the system to recover itself after a collapse. Morriss and Meiners (2013) note that during the successful market operations of the oil cartels, oil-producing countries through their national oil companies manage to transfer billions of wealth from consumer countries to themselves, more than what a fare and free market could offer. The inequalities in welfare gain from the trade of oil exhibit when comparing the economic growth of producer and consumer countries upon proper management of the resultant wealth. Morriss and Meiners (2013) argue that the 2014 slump in oil prices could was avoidable had the market been devoid of unfair cartels whose objectives failed leading to the mega drop in oil prices. The continued variability of global oil prices coupled with the increased use of clean energy and fuel-efficient machineries makes it difficult for cartels to predict the market trend. The cartels thus grow unstable and with time fail to meet their objectives and a collapse in the oil market ensues. To help assure a mitigation of such an occurrence in the future, Morriss and Meiners (2013) propose the need to have a free oil market devoid of cartels.
Despite the spirited efforts to galvanize support for clean energy, the world still heavily relies on fossil-based fuels. The dependency on the fossil fuels makes the world susceptible to the effects of changes in oil prices leading to situations of economic boom or collapse in various countries depending on the experienced impact of the decline or rise in oil prices. Ebrahim, Inderwildi and King (2014) observe that the global economy is heavily exposed to the macro-economic side effects of fossil-fuel reliance, prompting the need to develop mechanisms to counter the effect of the volatility in oil prices. Ebrahim, Inderwildi and King (2014) argue that oil is the most globalized commodity around the world, leading to the high economic responsiveness of the commodity’s price across all world markets. Economic growth in various countries is anchored on technology and machine use that depend on petroleum products making it difficult to avoid susceptibility to global oil price changes.
Suleiman (2013) observes that the high global oil consumption is not an issue that emerged recently but rather is a century long practice that powers global economic growth. The increase in demand for crude oil across the globe toppled the demand for coal as the world shifted allegiance to oil as its number one supplier of energy (Ebrahim, Inderwildi and King, 2014). Oil is regarded the lifeblood of the world economy and any forces disrupting its proper flow around the world touch the nerve centre of the globe’s economic growth inflicting either positive or negative side effects. Ebrahim, Inderwildi and King (2014) posit that the continued reliance on crude oil exposes the world to environmental degradation and other economic costs that have to be borne by either the producers or consumers depending on the price movements. Oil price volatilities plunges the world into a wave of uncertainties as it has to endure market instabilities based on the irregular changes in oil prices.
Scholars came up with several explanations as of why the world experienced a serious collapse of the oil industry as the prices hit a record low. Oil market collapse surprised all industry players due to the consistent growth and performance it had witnessed in the preceding periods. Voigt et al. (2015) concurs with Stavins (2015) in analyzing the effects of the collapse of the global oil market in the middle of the year 2014. The researchers note that large oil producing countries had to contend with tough economic times due to the decline in oil prices threatening the stability of their economies. The producers failed to realize economic growth as they struggled to finance their budgets and economic projects while others were threatened with political instability as opponents alleged the existing regimes of inability to tame the dwindling market.
According to Voigt et al. (2015), the main causes of the collapse in oil prices were the policy failures of OPEC, the rise in US oil production, which implied a decrease in demand for imported oil and the overall decline in global oil demand. The failure of OPEC’s objectives prompted the instability of the oil market, more importantly due to the existence of cartels that guided the production and sale of the commodity (Ebrahim, Inderwildi and King, 2014). Inasmuch as the effect of the drop in oil prices is positive among importing countries, the situation was thus unsustainable among producers prompting the need to have a timely recovery mechanism to help instil order and stability in the industry. Voigt et al. (2015) note that the US being a Superpower was adversely affected by the collapse in oil prices both directly and indirectly.
The instability created in various oil producing countries like Iraq and Libya required the US intervention to help assure economic and political sustainability of the respective economies. Political instability occasioned by the lack of ability to thrive among producing countries prompted the US intervention to help ensure order and stability. The US was largely affected as a producer because the country had become the world’s largest oil and gas producer as per the statistics released by the country’s energy commission by the time the world plunged into the global oil market collapse (Voigt et al., 2015). The increased production oil and gas in the US coupled with decreased global demand, in addition to the slackened economic growth in core consumer regions such as Europe legitimized the collapse of the oil industry.
Collapsed economies in the past brought about a ripple effect that disrupted the supply of oil in the global market. in the wake of the 2014 oil market collapse, Voigt et al. (2015) note that there was war in leading oil exporting countries such as Libya and Iraq that were already engaged in war with Islamic group terrorists. However, the researchers assert that there were no geopolitical concerns about the supply of oil from these war-torn countries as the supplies from their leading fields continued oozing thousands of barrels per day for export. The inability to disrupt oil production and export from these countries resulted in the continued flooding of oil in the international of market leading to a decline in prices due to the low market demand.
The crisis of oil shortages or rapid decline and increase in global prices is not a new phenomenon in the world as there have been various global oil issues before. According to Bauch (2011), the United States for had to brave a tough time in 1973 when an embargo barring pro-Israel oil countries was instituted by OPEC. The Organization of Petroleum Exporting Countries has operated like a cartel severally and has the capacity to disrupt the oil market due to the quantity of oil it injects into the global market. Bauch (2011) argues that the instability in te Middle East had a devastating effect on America as the country ran short of supply in both oil and gas. The oil crisis of the time was so bad that the country had to institute measures to create reserves to help enhance its preparedness to oil shocks. Oil being the lifeblood of all economic sectors around the world makes the global macro-economy susceptible to the oil price volatility.
Oil shocks refer to instances sudden of sharp rises in the prices of oil, which directly affect the economies of importing countries (Bauch, 2011). Oil shocks devastate the economies of importing countries just as price collapse affects exporters. Oil being the most traded commodity around the world subjects all dependent countries to responsiveness that require establishment of oil reserves to help cushion against times of price shocks. Bauch (2011) notes that price volatility of oil is unhealthy and the ability of importing nations to create sufficient reserves is important in helping them cushion against tough times. Ederington et al. (2011) observe that the collapse in the oil industry equally occurred in the 2007-2008 financial recession period when countries like the US had to undergo a tough financial period.
The recovery from the 2007 recession was not a speedy process, as the country’s administration had to struggle to recover the lost value of its currency in addition to its economic sector. Ederington et al. (2011) opine that fundamental factors in the global economy may be responsible for the formation and collapse of the oil bubble experienced during the financial recession of 2007. The oil industry is, thus noted to be subject to increases and decreases in prices occasioned by several factors that require adequate intervention to help realize order and sustainability of the market. The US is a major industry player in the oil industry due to its large consumption levels occasioned by the size of its economy in addition to the refinery services it conducts on behalf of various European countries.
Inasmuch as the world keeps focus on the use oil and stays susceptible to oil price volatilities, Hamilton (2012) argues that it is important to factor the going concern of oil exploitation. Firstly, the researcher notes that the operations of key players of the oil industry have not been factoring the exhaustibility of the rare but valuable resource. Oil is an exhaustible resource whose occurrence never replenishes. The oil industry players have never discovered renewable sources of fossil energy; they just keep discovering new oil fields around the world in need of exploitation (Ebrahim, Inderwildi and King, 2014). The realization of the exhaustibility of fossil energy is supposed to trigger the development of programs designed to enhance the sustainability of the industry upon complete exhaustion of all the oil fields in the future.
Stavins (2015) argues that fossil energy comes at a mega environmental and economic cost, prompting the need for the US and other fossil-energy consuming countries to adopt mechanisms to help contain the situation. The development of clean energy programs in addition to increased use of energy efficient machineries are some of the best ways to counter the increased dependency of fossil energy around the world (Hamilton, 2012). The creation of energy reserves among oil importing countries serves as an advanced control to increased cases of price shocks around the world.
The oil industry is controlled by cartels in the OPEC block that have the capacity to disrupt ordinary market operations in the oil industry, prompting the need for countries to avoid reliance on imported oil. Producers also need to diversify and undertake other economic activities to help avoid plunging into economic distress whenever the oil market collapses. As argued by Stavins (2015), all countries observe the need to avoid the use of fossil energy for the sake of the environment and the sustainability of planet earth.
Research Questions
This project will be guided by a set of questions that will help evaluate the impact of the collapse of the global oil prices in the middle of the year 2014 to the US economy. The guiding research questions will be:
- What caused the sudden drop in global oil prices in the middle of the year 2014?
- Did the US suffer the challenges of the sudden drop in global oil prices as a producer or an importer?
- How did the sudden drop in global oil prices affect the US economy?
- How did the US respond to the sudden drop in oil prices?
- What can the US government in collaboration with other leading industry players do to avert a recurrence of another oil market collapse?
Research Objectives
The main objective of this study will be to ascertain the impact of the collapse of the global oil prices to the US economy. Through this guiding objective, the study will be able to examine how the collapse of the oil market in 2014 came to be despite the tremendous growth enjoyed by the industry prior to the mid-2014 phenomenon. The study will thus centralize on ascertaining the overall effects of the sudden drop in oil prices on various economies with specific interest on the US economy. The supporting objectives in this study are:
- To examine the macro-economic effects of the global drop in oil prices to the US security initiatives and programs around the world.
- To ascertain the effect of the drop in global oil prices to the US initiatives on environmental conservation and clean energy use.
- To find out the main causes of the sudden drop in global oil prices in the middle of the year 2014.
- To analyze the measures the US government and other industry players could have put in place to help overcome the global collapse of the oil market.
- To draw recommendations on how best a similar oil crisis can be avoided in future.
With the help of the fore-listed research questions and objectives, the study will be successfully undertaken to help bring forth an explanation on why the global collapse in oil prices came to be, how it could be avoided and its impact on various economies such as the US. The study questions and objectives provide succinct guidelines for the study hence, assuring the viability of this project.
Research Methodology
The study of the effects and challenges of the collapse in oil prices to the US economy will be a tedious and expensive process once quantitatively undertaken. Thus, this study will embrace a case-study design to help achieve its goals and objectives. The study will use the United States case study to help ascertain the impact of the global dip in oil prices to various economies. The US case study was preferred to other states because of the country’s high level of imports and exports, its sound energy policies, in addition to its involvement in global matters affecting different countries due to its Superpower status.
A qualitative design is best suited for this study as it helps develop analyzes comparisons and inferences of the subject matter under study (Yin, 2013). The use of secondary data in this project will help examine the available literature with regard to the oil industry, with specific interest on the effects of the collapse of the oil market in mid-2014 to the US economy. The researcher will collect detailed literature covering published country reports, scholarly literature from academic journals, and company reports with regard to what actually happened during the 2014-2015 oil crises. The existing literature in the oil and gas industry will thus help the researcher understand how the operations in the oil industry have been going on for several decades now in addition to creating insight on how other market collapses happened in the past. The study will go through the recovery mechanisms employed by the affected companies and economies in addition to perusing through the recommendations for future recovery from previous experiences.
After collecting a wide variety of literature with regard to the issues regarding the oil industry and particularly the 2014 market collapse, the researcher will then analyze all the findings to help ensure they meet the study objectives and goals. The framework of analysis in this study will involve the organization of the available study materials into categories of interest. The first category of literature analysis will be reports and materials detailing the causes of the 2014 oil market collapse across the world. The reports will provide vital information with regard to what could have actually led to the crisis in the oil industry that negatively affected producer countries while largely benefiting consumer economies with efficient mechanisms to that assured trick-down effect.
The next category of analysis vital to this study will be the examination of scholarly materials and reports talking about the effect of the 2014 oil industry collapse on producer economies like the US and other Middle East countries like Saudi Arabia. The analysis of materials with this information will help the researcher comprehend the exact effect felt by producers because of the collapse in global oil prices in the year 2014. The data available in these documents particularly with regard to how the United States as a leading producer of both oil and gas had to sail through the tough economic times in the global oil market will help the study achieve its goals and objectives. Several oil companies in the United States were engaged in the production and sale of oil domestically and internationally, hence, the impact to the US companies and the government will largely help the researcher realize the study objectives and goals in detail.
The next category of sampled literature will be that relating to effects of the global collapse in oil prices on the oil consuming countries. The researcher will analytically examine the gains and challenges faced by oil consuming countries around the world during the time of the crisis. Of particular interest will be the data relating to the effects the collapse had on the United States as an importer of crude oil. The examination of literature exhibiting the gains the United States made as a consumer of imported oil will help examine the effects the drop in prices had on various sectors of the US economy. The researcher will be interested in ascertaining the direct benefits the US consumers experienced due to the slump in prices.
The study researcher will also sample and analyze literature containing information with regard to the negative effects of the drop in oil prices to the US economy and the sustainability of the globe at large. This will be occasioned by the understanding of the negative effects of fossil fuels to the environment leading to negative effects such as global warming. Thus, this study will analyze how the massive drop in oil prices negative affected the US economy in addition to largely contributing to environmental degradation. The researcher intends to conduct a detailed study on the effect of the drop in global oil prices to the US economy across various frontiers to help gauge the negative effects of the crisis to producer economies, the benefits to consumers and the benefits in disguise to the environment and the over consumer economy.
The researcher will also ensure that the data collected is reliable and use the most relevant literature to help the study achieve its goals and objectives. To help the collected materials for the study, the researcher will interview industry players in two renowned market players to help ascertain the impact the oil market collapse had to the US economy. The interviews will be designed to help get the feedback of leading personnel from at least two oil manufacturing companies in the United States in addition to interviewing twenty fossil fuel users who were in the industry during the period of the oil market collapse.
The study participants will be determined through purposive sampling and will be coupled up with at least two environmentalists and two economists who will help provide feedback with regard to the effect of the oil market collapse to the environment and economy respectively. The feedbacks from all respondents will be documented, analysed, and presented in the form of tables and graphs to help enhance soundness and comprehension. The study will also provide data gathered from the available literature in the form of tables and graphs to help enhance understanding.
The study will take place for a period of three months and will involve the breakdown of activities within the stated period. The researcher will within this period collect, sort, and analyze data regarding the causes of the collapse of global oil prices in 2014, in addition to materials talking about the effect the collapse in prices had on the US as a producer of oil. Moreover, the study will also focus on available data with regard to the effects of the collapse of global oil prices on consumers with particular interest on the US, as a major consumer of crude oil. Finally, the researcher will also conduct a detailed research with regard to the benefits and costs of the sudden drop of global oil prices to the US economy with particular focus on the nation’s environmental and economic sustainability.
The literature resource collection and analysis process will take place in a period of two weeks after which the researcher will arrange the collected data based on the objectives presented. In the second month, the researcher will conduct physical and phone interviews on the selected respondents. The data will be documented, sampled, and analysed through the coding process and presented based on the objectives and research questions. The findings from this study will be compiled and presented in the forms of tables and graphs at end of the fourth week and an analysis will be conducted to help check whether the study met the intended research goals and objectives.
Conclusion
The global collapse of the oil market in the years 2014-2015 largely affected the global economic growth due to the high dependence of fossil fuels around d the world. Producer nations bore tough economic times due to the massive drop in revenues from their most valued commodity while consumer countries enjoyed the proceeds of cheap oil. The 2014 oil crisis challenged the economic sustainability of various sectors of both producer and consumer countries in addition to contributing to environmental degradation. This study will undertake a detailed analysis of the impact of the 2014 slump in oil prices to the United States economy.
Table 1: Resource Plan
| Work Package | Activity | Duration in days | Resource type | |
| Collection of relevant literature | Collecting scholarly articles, academic journals, government oil industry reports and company reports. | 21 | Scholarly articles and other academic materials Researcher | |
| Sampling of collected data | Sample collected literature as per stipulated categories | 3 | Researcher | |
| Analysis of collected materials | To evaluate the contents of sampled materials | 4 | Researcher | |
| Drawing interview questions and schedules | Develop interview materials for the study | 3 | Researcher | |
| Conducting actual interviews | Conduct interview on designated respondents | 10 | Interview respondents | |
| Compiling interview findings
| Analyse and present findings | 7 | Researcher | |
| Compile Study and Present Final draft | Presentation of draft | 7 | Researcher | |
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