The plummeting price of oil is still the biggest energy story in the world. The oil price has fallen by more than 40% since June, the price of Brent crude as in Diagram 1.This comes after nearly five years of stability. At a meeting in Vienna on November 27th the Organisation of Petroleum Exporting Countries (OPEC), which controls nearly 40% of the world market, failed to reach agreement on production curbs, sending the price tumbling. Also hard hit are oil-exporting countries such as Russia (where the rouble has hit record lows), Nigeria, Iran and Venezuela. Why is the price of oil falling?

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, which after a lag boosts supply. Similarly, low prices lead to an investment drought. OPEC’s decisions shape expectations; if it curbs supply sharply, it can send prices spiking. Saudi Arabia produces nearly 10m barrels a day—a third of the OPEC total.

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, two big oil producers with nearly 4m barrels a day combined has not affected their output. The market is more sanguine about geopolitical risk. Thirdly, 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. 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 little (around $5-6 per barrel) to get out of the ground.

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 involving drilling in deep water or in the Arctic, or dealing with maturing and increasingly expensive fields such as the North Sea. But the greatest pain is in countries where the regimes are dependent on a high oil price to pay for costly foreign adventures and expensive social programmes. These include Russia (which is already hit by Western sanctions following its meddling in Ukraine) and Iran (which is paying to keep the Assad regime afloat in Syria). Optimists think economic pain may make these countries more amenable to international pressure. Pessimists fear that when cornered, they may lash out in desperation

World\'s largest oil exporter is forcing prices lower to win back market share but the high-risk strategy will test the house of Saudi like never before. Saudi Arabia has won the opening battle of its radical oil strategy by forcing prices lower. But the kingdom is about to enter into a dangerous new phase in its war to regain control of the world’s oil market.
Saudi succeeded in bullying the other members of the (OPEC) into continuing to pump their current quota of 30m barrels per day as its first objective. The kingdom’s veteran oil minister Ali Naimi clearly believes is necessary to shut down the cartel’s biggest rivals in Russia and the shale oil fields of Dakota. With 13pc of global oil reserves and the cheapest production costs, the kingdom believes that it can still buy back the market and secure higher prices over the long term. This is one of the most important policy initiatives by Saudi Arabia in the modern era. If victorious, Saudi Arabia will emerge stronger after re-asserting its global significance as the custodian of the world’s primary energy source. Besides, Saudi Oil Minister Ali al-Naimi, the architect of OPEC’s strategy to regain market share by causing the price of crude oil to plunge,