--Abstract from Why the oil price is falling / ECOCN
THE oil price has fallen by more than 40% since Jun
This comes after nearly five years of stability.
The oil price is partly determined by
actual supply and demand
and partly by expectation.
Demand for energy is closely related to economic activity.
It also spikes in the winter in the northern hemisphere
and during summers in countries which use air conditioning
Supply can be affected by weather
which prevents tankers loading
and by geopolitical upsets
If producers think the price is staying high
they invest after a lag boosts supply
low prices lead to an investment drought.
OPEC's decisions shape expectations
if it curbs supply sharply
it can send prices spiking.
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Four things are now affecting the picture
Demand is low
because of weak economic activity
increased efficiency
and a growing switch away from oil to other fuels.
Second
turmoil in Iraq and Libya
has not affected their output
Thirdly
America has become the world's largest oil producer
Though it does not export crude oil
it now imports much less
Finally
the Saudis and their Gulf allies
have decided not to sacrifice their own market share
to restore the price
They could curb production sharply
but the main benefits would go to countries they detest
such as Iran and Russia
Saudi Arabia can tolerate lower oil prices quite easily
It has $900 billion in reserves
Its own oil costs very littleo get out of the ground
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The main effect of this
is on the riskiest and most vulnerable bits
of the oil industry.
These include American frackers
who have borrowed heavily on the expectation of continuing high prices.
They also include Western oil companies
with high-cost projects
But the greatest pain
is in countries where the regimes are dependent on a high oil price
to pay for foreign adventures and social programmes.
These include Russia
which is already hit by Western sanctions
following its meddling in Ukrain
and Iran
which is paying to keep the Assad regime afloat in Syria)