Oil Prices Keep Dropping Despite Production Cuts

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Oil producers are about to reduce output, and tensions are growing in the Middle East. Such developments usually tend to drive up oil prices, but the global economic recession is becoming so severe that energy consumption keeps falling. Oil prices are down more than 70 percent since last July.


Oil prices finished the year about a hundred dollars lower than they had been. Last summer oil was approaching $150 per barrel and some analysts predicted prices would keep going up. Instead oil prices crashed and closed yesterday around 45. NPR's Yuki Noguchi has more.

YUKI NOGUCHI: With oil-producing countries pledging a cut in production and unrest growing in the Middle East, it would seem oil prices should be heading up, except they aren't. The reason?

Mr. TIM HANSON (Senior Analyst, The Motley Fool): It would be the economy and the perceived lack of demand in 2009.

NOGUCHI: That's Tim Hanson, a senior analyst with research company The Motley Fool. He says what happened this year was a total flip of the supply and demand curve.

Mr. HANSON: Six months ago when oil prices were so high, what everybody saw was that we are finding and drilling for fewer and fewer barrels of oil every year as we exhaust proven reserves and that the demand for fuel product is going up very quickly, particularly in places like China and the other emerging economies.

NOGUCHI: But then came the financial crisis, and that had an impact on places like China, Hanson says, where dozens of factories shut down.

Mr. HANSON: These things are all interconnected. And when factories slow down and start making less, you know, we're going to use less energy, and oil prices are going to drop, which on the other end of things causes drilling to slow down a little bit, which maybe in a few years causes oil prices to go back up a little bit.

NOGUCHI: And with OPEC, or the Organization of Petroleum Exporting Countries, pledging to cut production as of today, Hanson says oil prices could be back on the rise. Yuki Noguchi, NPR News.

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