Everyone knows that the oil price keeps significantly falling. Back in June 2014, the price of oil was around $120 per barrel. However, the oil price has decreased more than 40 % since June and it is now $ 55 per barrel in January 2015. This statistics suggests that the drop in the oil price is just not a coincidence. Then why does the price of oil keep falling?
The oil price is mainly determined by actual supply and demand of oil, indicating that the technology is also an important factor that impacts the price of oil. As of 2010, the U.S. oil companies succeeded to extract a massive amount of oil using shale oil extraction. Shale oil extraction is an industrial process involves use of hydrogenation, or thermal dissolution to convert kerogen in oil shale into shale oil. Due to the growth of shale oil production, American oil companies are the world’s largest oil producer that produces a huge amount of oil. Thus, the supply of the oil has been significantly increasing since 2010, which also led to decrease in a price of oil.
In addition, many oil experts assumed that it would take longer time for Libya to produce oil because of internal strife. However, Libya succeeded to solve the inner problem much quicker than the anticipation and began to produce oil, increasing unexpected quantity of oil.
More importantly, however, OPEC members failed to come up with an agreement to increase their oil prices or decrease their quantity produced, which could stabilize the price of oil. OPEC is the world’s largest oil cartel that has powerful control over the quantity of oil. However, OPEC members such as the Saudis and Kuwaitis did not make a decision to give up market share and they are now hoping that lower oil price would damage the U.S oil companies that employ shale oil extraction. OPEC Secretary-General Abdalla El-Badri said, “We will produce 30 million barrels a day for the next 6 months, and we will watch to see how the market behaves”, suggesting that there is a still possibility that the price of oil would decrease even further.
At the same time, the demand for oil has been decreasing in most countries due to weakening economics. This partly explains why the oil price keeps falling as the supply of oil exceeds the demand for oil. This is well described by the below chart that shows the supply of oil is much higher than actual demand by late 2014.
The demand for oil from Asia, Europe and even the United States began to shrink as their economics are doing poorly. At the same time, countries like Indonesia and a few other Asian countries have been cutting back on fuel subsidies, which decreased the demand for oil even more.
It is hard to predict if oil prices will keep falling but I think that the price will stay low as long as demand is substantially lower than oil supply. More importantly, if OPEC decides to decrease their production and the consumption of oil from developing countries increase, the price of oil would increase. Yet, no one can exactly predict what will happen to oil prices and its impact on the world economy.