Why is the oil price so low?

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The oil price as been circling around $45 per barrel for well over a year now — compared to over $100 the year before. Why?

1. United States domestic production has nearly doubled

Over the last several years, US domestic production has increased almost 100 percent. So the US imports less. And the oil it imported before now needs to find another home. It’s significant that US producers are private companies that compete in a market, they are much less suceptible to political calculus than, say, state-owned enterprises in OPEC.

US-production
From Market Realist

2. OPEC doesn’t counteract the low prices

Middle Eastern oil producers (notably Saudi Arabia) started producing more oil so that US producers would shut down their oil business due to lower oil prices. They have been marginally successful.

3. Demand in Europe is decreasing

Because of its sluggish economic growth and better fuel efficiency, European demand is down too.

Outlook

  • Generally: Oil importers profit, producers lose.
  • Particularly governments who derive revenues from oil-rents stand to lose.
  • The US sees its reliance on Middle Eastern oil decrease, which is geopolitically significant.
  • It’ll be interesting to see if growth in Asia (notably China) boosts global demand enough to raise the price again.

Good articles

  • http://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html
  • http://marketrealist.com/2015/12/us-crude-oil-production-crucial-2016-prices/

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