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Studies 01 December, 2015

Factors Behind the Steep Decline in Crude Oil Prices

Mamdouh Salameh

​Mamdouh Salameh is an International Oil Economist and a World Bank Consultant on oil and energy. Salameh is currently a Visiting Professor of Energy Economics at the London campus of ESCP Europe.

The price of crude oil has lost 54% of its value since September 2014 and there are no indications that the fall in prices will stop here unless a major production cut by OPEC is declared. The reasons given for the steep oil price decline thus far include: a glut in the global oil market caused by rising US shale oil production, over-production by members of the Organization of Petroleum Exporting Countries (OPEC) beyond their production quotas, and a slowdown in China and European Union (EU) economic growth thus reducing global demand for oil.

Exacerbating these factors was OPEC's erroneous decision not to cut production by at least 2 million barrels a day (mbd) as a way to absorb a glut in the oil market. Had OPEC cut their production, Russia and Mexico would have followed suit and cut production by 500,000 barrels a day (b/d) and 300,000 b/d respectively. This would have meant a total of 2.8 mbd less on the world market, a number capable of removing the glut and stabilizing the oil price. Russia and other non-OPEC producers are extremely unlikely to cut their production without OPEC leading the way. It is not, then, too late for OPEC to reverse their earlier decision to cut production. Still, a glut in the global oil market estimated at 1-2 mbd and a slightly slower economic growth in China and the EU should not have led to such a steep decline in oil prices. The global economy has suffered worse crises simultaneously during the period of 2008-2011, when banks and economies were in turmoil – and still oil prices never declined as steeply or for such a long time. 

In the past, when oil prices dropped, OPEC immediately cut production as a way to bolster oil prices. On November 27 2015, however, at OPEC’s 166th meeting, strong pressure from Saudi Arabia prompted OPEC’s decision not to cut production. 

Circumstantial evidence suggests that political collusion between Saudi Arabia and the United States was behind the steep decline in oil prices, and suggestions are that this action was aimed at reducing the oil revenues of Iran and Russia.

Indeed, Saudi Arabia took advantage of the low oil prices to inflict damage on Iran’s economy and weaken its influence in the Middle East in its proxy war with Iran over its nuclear program. For its part, the United States has taken advantage of the low oil prices to weaken Russia’s economy and tighten the sanctions against Russia over the Ukraine.

 

To read the full text of this Research Paper, please click here or on one of the icons above. An earlier version of this paper was presented at an ACRPS event on the decline in the global price of crude oil held on November 7, 2015.