The truth behind the sliding oil price

As oil prices continue their
downward spiral, readers
who are possibly feeling too
optimistic about cheaper-thancheap
prices at the pumps have
been cautioned that the history
of oil is one of booms and busts,
followed by more of the same.
And the current scenario
all boils down to the simple
economics of supply and
demand.
A central factor in the
sharp price drops is that the
Organisation of Petroleum
Exporting Countries (Opec)
has continued
to refuse to
intervene
and stabilise
markets that
are considered
to be
oversupplied.
Its prices of
benchmark
crude oil have
fallen about
50% since it
decided not to cut production
at a 2014 meeting in Vienna,
Austria.
While the likes of Iran,
Venezuela and Algeria have
been pressing the cartel to cut
production to firm up prices,
the Gulf states – led by Saudi
Arabia and the United Arab
Emirates (UAE) – have pointblank
refused to do so. And
indeed, press reports have
revealed that Iraq is actually
pumping more.
One of the speculative
reasons for this Opec reticence
about pushing up prices – again
suggested to be largely driven
by its master producer, Saudi
Arabia – is the fact that US
domestic production has nearly
doubled over the past six years.
And, despite a slow-down
earlier in the year, it has once
again enjoyed a resurgence in
the last month or so.
Opec, it
was said, had
adopted this
strategy to try
to cut prices
to a level that
would cause the
US producers,
particularly
the shale-oil
drillers, to
find things
uneconomic,
and cut production.
But, if that is the case, it
has only temporarily worked
up to now. One thing that has
definitely happened is that
output growth in the US has
been pushing out oil imports
into that country – and they
have needed to find
another home.
Extrapolating from this
scenario, the likes of Saudi,
Nigerian and Algerian oil that
was once sold in the US is
suddenly competing for Asian
markets. And, because these
areas of the world, especially
China, are getting economically
tighter, the producers are forced
to continue dropping prices.
A major newspaper has also
pointed out that Canadian
and Iraqi oil production and
exports are rising year after
year. “Even the Russians,” it
said, “with all their economic
problems, manage to keep
pumping.”
Meanwhile, on the demand
side, the Eurozone economies
and those of developing
countries are weakening. Also,
China’s recent devaluation of its
currency suggests the economy
of the world’s biggest oil
importer may be worse off than
expected.
Add to that changes to other
energy sources in recent years
(while oil prices still lurked at
the US$100 a barrel level) and
vehicles and other machinery
becoming more energyefficient
– and there's further
reason for a drop in demand.
When are oil prices likely to
recover?
Not anytime soon, according
to the international press
reports. Oil production is still
increasing in the US and other
countries. Although demand
for fuels is recovering in some
countries, any production cuts
look unlikely in the near future.
And, until both things happen,
it would seem that crude prices
cannot begin to recover in a
lasting way.
INSERT
US domestic
production has nearly
doubled over the past
six years.