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The global politics of falling oil prices

By Peter Westmore - posted Thursday, 4 December 2014


After years of high oil prices driven by scarcity and fears that oil is running out, the price of crude oil has fallen from about $US115 to less than $US70 a barrel over the past six months, causing a dramatic and welcome fall in the price of petrol at the bowser.

What is going on?

Like other commodities, the crude oil price is basically driven by supply and demand.

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For decades, the environmental movement has been insisting that non-renewable fossil fuels are running out, that we have passed "Peak Oil" (when global crude oil production passes its upper limit), and that the world is on the brink of acute shortages, if not the end of the petroleum era.

Contrary to this Doomsday scenario, despite the steady increase in oil consumption, new reserves of oil and gas are being discovered and, depending on cost, brought on line.

High prices of crude oil had the effect of encouraging further exploration and the expansion of production from fields which would otherwise be economically marginal.

These incentives have been spectacularly successful, particularly as a result of the expansion of oil and gas production from shale, using new extraction techniques.

Further, slowing growth in China and improved efficiencies in energy usage have led to reduced global demand for oil. These factors put downward pressure on oil prices.

At this point, politics enters the equation, and we need to look at the major suppliers of petroleum.

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Since the early 1970s, the price of crude oil has been controlled by the Organisation of Petroleum Exporting Countries (OPEC), the most successful cartel in the history of the world.

OPEC is dominated by Saudi Arabia, along with the oil producing states of the Persian Gulf. Saudi Arabia can continue to supply oil profitably to the world at half today's prices.

Saudi Arabia works with the United States, the world's largest consumer of petroleum, to regulate the price of oil. This ensures that the oil producing countries get a fair price for crude oil, but that oil prices do not rise in a way which would damage the world's economy.

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About the Author

Peter Westmore is President of the National Civic Council and publisher of News Weekly. He is an engineer by training.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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