Oil Price future explained -Demand Supply Curve
Let us study the future of Oil prices with Macro economic theories. The primary reasons for the fall in oil prices were due the the shale oil boom. This shale oil boom might be a bubble . Many economists are speculating it. The reason Shale oil is costly because of its Exploration cost and the high drilling costs involved with it. In addition EU , Chinese and Japanese economies have been declining . Also this leads to decline in oil demand. China the second largest importer of oil has reduced its import.
S1 and D1 were the initial demand curves. A was the point of equilibrium. Due the Shale boom the supply has now increased thus moving the supply curve to the right. The point B is the new intersection where prices have now lowered and supply is high.
Further escalating the crisis the demand has also fallen due to reasons mentioned earlier. We draw the new demand curve that further brings us to C where the new equilibrium is now.
The catch here is that if the supply were to reduce (which aint happening) we could go back to the old supply S1 and the new point of equilibrium will be D. But as it not the case with Shale oil being pumped out in Argentina and US supply is likely to reduce. Reports say that oil supply will become uneconomic at prices around $40 per barrel. The cost includes exploration R&D drilling cost and other costs . Since the prices have not stabled at $75 a barrel we can enjoy oil at low prices and reduce out imports and fiscal deficit.