As Americans recovered from Thanksgiving, a battle between the member nations of the Organization of Petroleum Exporting Countries, or OPEC, was resolved — at least for now — in favor of those who want to keep oil output at existing levels and against those advocating for a cut in production to drive prices higher.
Oil prices have been falling for months now, creating a dilemma for OPEC countries. They could cut back on production, creating scarcity that might drive prices higher, but at the risk of losing share in the global oil market. Or, they could continue to supply oil at the current level, protecting their market share even as prices have plunged.
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Representatives of wealthier oil producing countries, like Saudi Arabia, were more concerned about the potential loss of market share that could accompany a cutback than they were with the reduced revenues from low prices. Poorer oil producing countries were more concerned about the price per barrel. In the end, led by the Saudis, the wealthier countries prevailed, in effect declaring a price war with U.S. producers, whose costs are higher than those of most OPEC countries.
The result was a plunge in oil prices Thursday night that persisted into the trading day on Friday, when benchmark prices for oil sank to five-year lows of around $70 per barrel of Brent crude.
There are many factors driving the drop in prices, including weaker than usual demand from Europe and China, and the large amount of shale oil flooding the market from the fracking boom in North America.
The price of oil has fallen approximately 30 percent year-to-date, and the downward trajectory won’t likely be changed soon, now that OPEC — the cartel with more market power than any other player in the business — has decided against trying to drive prices up. While the dropping price will likely affect what motorists pay at the gas pump as well as many consumers’ heating bills, the impact reaches into the broader economy as well as geopolitics.
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In the U.S., cheaper oil is usually associated with economic growth, as it makes it less expensive for producers in any number of industries to create their products and get them to market. It is also, arguably, good news for a beleaguered President Obama, as the price of gas is one of the economic indicators most widely noticed by ordinary consumers.
Overseas, one of the biggest losers from the oil swoon is Russian President Vladimir Putin. The Russian economy, already stagnant and expected to remain so indefinitely, is utterly dependent on its oil and gas exports for survival. The falling oil prices are a major blow to the country’s tax base at a time when international sanctions, imposed in response to the Russian invasion of Ukraine, continue to drag the economy down.