Who controls the oil price? In June 2014 the price for a barrel of Brent crude was $118 but today it is less than half that at $51.12. The big question is what has caused this drop and who, if anyone, controls the price in the future? The price of oil, like any commodity, varies according to demand and supply. When demand outstrips supply the price increases and vice versa. So how did the world go from a global deficit to a global surplus in just six months? For this there is no straight forward answer as governments and oil majors are often secretive of their intentions and future plans. The information below is purely a summary of ideas and concepts from business and financial analysts as well as some ex-industry employees. So, let’s start with demand: Global demand was set to continue increasing due to population growth and a greater consumption of oil from developing countries. However, Europe is still in the grip of a financial downturn and with the IMF predicting that the EU has a 40% chance of another depression demand from these countries has fallen. More importantly it has also fallen in rapidly developing countries such as China, leading to a decrease in global demand that bucks every predicted trend out there. In short in the last 6 months the world just hasn't been consuming as much oil as everyone thought it would. Then there is the conundrum of supply. The US oil boom has meant that America has almost ceased importing oil and has converted its refineries from import into export. This means there is a surplus of oil on the market, but this was not expected due to the growing unrest in the middle east. Wars in Libya and the conflicts caused by ISIS were predicted to cause countries such as Iraq and Libya to ‘go offline’ (stop producing oil). However, for quite some time this was not the case and it was only on the 14th December 2014 that Libya's main oil terminal finally ceased operations. So it’s a simple case of too much oil and too little demand? Unfortunately not, and this is where OPEC comes in. OPEC is a cartel of Oil Producing and Exporting Countries led by Saudi Arabia and including Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Venezuela and the United Arab Emirates. Since 1960 this cartel has effectively regulated the price of oil, cutting production when demand was low and increasing it when it rose. Each country receives a quota of oil to produce that is a percentage of that country’s total reserves. So why has OPEC not reigned in production to curb the falling oil price? Well this is where politics get involved and conspiracy theorists get excited. Here are three proposed reasons why OPEC has not cut production, and each one is as plausible as the next. 1) OPEC is trying to drive the US oil shale companies out of business The discovery of the Eagle Ford and Bakken fields have meant that the US could become the world’s largest producer of oil. This obviously threatens OPECs monopoly and they might be driving the oil price down so that production in the US becomes uneconomical. However, this means that OPEC too is losing money, which while not a problem from Kuwait, Qatar and Saudi Arabia in the short term, could cripple countries such as Nigeria whose economy depends on oil revenue. 2) OPEC and the US are working together to punish Russia Saudi Arabia and the US are on good terms and recently Russia has acted in a way that has riled both of them. Russia has reopened a cold war base on an island off the coast of the US as well as “reclaiming” parts of Europe that have been recognised as independent countries by the west. Furthermore, Russia’s move to support Syria during the ongoing disturbances did nothing to improve its relations with Saudi Arabia. Russia’s income depends almost solely on the sale of its vast oil and gas reserves and by driving the price down, the US and Saudi Arabia are hurting Russia far more than any of the European imposed sanctions. 3) Saudi Arabia is reminding OPEC’s members to play by the rules As previously stated each country is given a quota or a certain amount of barrels of oil to produce that must not be exceeded. Earlier in 2014 several of the countries such as Nigeria and Iran surpassed their quotas to capitalise on the high oil price. Furthermore many of the countries have conflicting views on how the cartel should be operating. It has been proposed that Saudi Arabia is now attempting to punish these countries for their disobedience by driving the price down, crippling their economies and causing them to reign back on production. Regardless of the cause, if exporting countries don’t curb their production while demand is low the price will continue to fall. So enjoy the low petrol prices while you can as the oil price could rise as again as quickly as it fell! - Watson References: http://www.ft.com/cms/s/0/dcdab458-86c4-11e4-8a51-00144feabdc0.html http://www.ft.com/cms/s/0/bcf89006-5096-11e4-b73e-00144feab7de.html Further Reading:http://www.ft.com/cms/s/0/86916314-8776-11e4-bc7c-00144feabdc0.html http://www.ft.com/cms/s/2/3f5e4914-8490-11e4-ba4f-00144feabdc0.html http://www.ft.com/cms/s/0/a2bf0be8-929a-11e4-9e68-00144feabdc0.html http://www.ft.com/cms/s/0/9ab77884-57cd-11e4-8493-00144feab7de.html