In a press release this week, the World Bank predicts that if the P5+1 deal with Iran clears congressional approval in the United States, oil will drop by $10 per barrel in 2016 as Iran’s oil begins to hit the global markets.
This news comes as oil hit a six-year low this week, partially due to China’s devaluation of the yuan.
Where’s the Prosperity?
Back when oil took its first dive late last year, countless thousands claimed it would lower prices (oil is an embedded cost in most production) and increase spending in the economy.
Where’s this prosperity been?
If anything, the Consumer Price Index (CPI) has been flat for the past year, indicating little to no economic growth.
While energy costs are sharply lower — and definitely help the consumer — the benefits aren’t showing up in the other categories.
This would tend to indicate that Americans are paying down personal debts and saving with the $750 annual savings the cheap gas has provided.
This is good for the individual consumer — not so good for the economy as a whole.
Double-Dip for 2015
The government expects oil to continue to drop throughout 2015, possibly with gas prices reaching as low as $2/gallon at the pump.
Part of this is a trapped oil industry that is so debt-ridden that they have to pump at any price to pay for debt service.
A bigger part is that producers and traders had been stockpiling oil by every means possible (including ships out at sea) trying to create an artificial bump in prices. However, that oil is now coming to market as they have run out of places to stockpile the oil.
The already hit domestic oil producers are now looking to face another two years of suppressed oil pricing.
Will Oil Play into the Politics of the Iran Deal?
The government expects oil to continue to drop throughout 2015, possibly with gas prices reaching as low as $2/gallon.David Yee, IVN Independent Author
Other voices in the political process can’t possibly be happy with this news — like domestic oil producers and Keystone XL proponents.
Some producers are claiming that shale oil can now be profitable at $65 a barrel (opposed to the $80-100 break even point last year), yet a double-dip in oil would put this completely out of reach as well — possibly putting an end to shale oil production permanently.
While the belief in the “Axis of Evil” and the nuclear implications will probably dominate the debate over the Iran deal. politicians would be foolhardy not to look at the implications it will have on our own economy and oil production.
Who knows how the politicians will react, but if Americans react as before, they’ll welcome the cheap oil today at any future cost, regardless of who delivers the Greek-gift.