Why are oil prices falling?

Why is the price of oil falling?

There are demand-side and supply-side explanations for current low oil prices. Besides supply and demand, the financial market development also behind the falling oil prices.

The strong US dollar

The strong US dollar has been the main driver for the price decline of crude oil over the last few years. In fact, the dollar is at a 12-year high against the euro, leading to appreciations in the US dollar index and a reduction in oil prices. This puts the market under a lot of pressure, because when the value of the dollar is strong, the value of commodities falls.

Weak demand

Demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other fuels. The economies of Europe and developing countries are weakening, and at the same time, vehicles are becoming more efficient, which has caused the demand for fuel to lag. China’s devaluation of its currency suggests its economy may be worse off than expected. With China being the world’s largest oil importer, this is a huge hit to global demand.

Oversupply of crude oil

Another leading factor in the sharp price drop of crude oil is that OPEC, a cartel of oil producers, is unwilling to stabilize the oil markets. Oil prices fell 50 percent when the organization decided against cutting production at an OPEC meeting in Vienna in November 2014. Of the participating countries in OPEC, Iran, Venezuela and Algeria wanted to cut production to firm up prices. Saudi Arabia, the United Arab Emirates and other Gulf allies refused to do so. The US nuclear deal with Iran allows more Iranian oil exports. The deal removes Western sanctions against Iran, and investors fear it will add to the world’s oversupply of oil. America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply.


References:

  • Evan Tarver, “4 reasons why the price of crude oil dropped,” October 22, 2015

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Global Resource Politics: the Past, Present and Future of Oil, Gas and Shale

Hanyang University