Why Low Oil Prices Here To Stay

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Guy Bentley Research Associate, Reason Foundation
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The world’s leading energy organization has delivered another dose of good news to consumers: The price of oil will remain low well into 2016.

The International Energy Agency’s (IEA) monthly report released Tuesday said there would continue to be an oil glut thanks to an increase an Iranian exports expected at the beginning of next year and a slowdown in global demand.

Although lower prices mean bad news for oil producers, cheaper energy is a big benefit for the overall economy. Lower energy prices for individuals and businesses means lower costs for manufacturers and more resources are available to spend on consumer goods.

Oil prices have fallen dramatically over the past year from $114 a barrel in June 2014 to trading under $50 a barrel Tuesday. (RELATED: Experts Urge Caution After Shock Report Shows Oil Falling To $20 Per Barrel)

Producers are struggling with a stock market crash in China, continuing crisis in the eurozone and below-trend economic growth in the U.S. The International Monetary Fund’s World Economic Outlook reduced world economic growth by 0.2 percentage points from 2015 and 2016.

According to IEA, despite falling production from U.S. producers the Organization of the Petroleum Exporting Countries (OPEC) has refused, so far, to cut production to drive up prices.

Furthermore, the end of sanctions on Iran will mean more supply coming online early next year. Iran’s contribution could amount to as much as 700,000 barrels per day.

Given a prolonged period of lower prices, IEA expects non-OPEC countries to slash production by as much as 500,000 barrels per day.

“A projected marked slowdown in demand growth next year and the anticipated arrival of additional Iranian barrels — should international sanctions be eased — are likely to keep the market oversupplied through 2016,” the report said.

IEA forecasts that worldwide consumption next year will average 100,000 barrels a day less than it did in 2015 at 95.7 million. Despite the severe conflict across the region Iraq’s oil output has also reached record levels adding to the swelling supplies of oil.

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