With Turmoil Roiling Abroad, Why Aren't Oil Prices Bubbling Up? Conflict in oil-producing regions usually sends oil prices higher. But the cost of oil has actually dropped, despite turmoil in the Middle East. Economists say it's a matter of supply and demand.
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With Turmoil Roiling Abroad, Why Aren't Oil Prices Bubbling Up?

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With Turmoil Roiling Abroad, Why Aren't Oil Prices Bubbling Up?

With Turmoil Roiling Abroad, Why Aren't Oil Prices Bubbling Up?

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  • <iframe src="https://www.npr.org/player/embed/348685733/348765034" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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ROBERT SIEGEL, HOST:

The price of oil has fallen 15 percent since June. It's now well below $100 a barrel. That drop in price has occurred at a time of conflict in and near oil-producing regions. Normally, we expect oil prices to spike at times like these. NPR's John Ydstie explains why that has not happened.

JOHN YDSTIE, BYLINE: The decline in oil prices may have already affected your pocketbook. On average, it's costing almost 10 percent less now than it was in June to fill up your car at the pump, and that's happened with conflicts flaring. The global price of oil did rise to $112 a barrel in June, when Isis first swept into northern Iraq. But since then, the price of crude has trended down, despite the U.S. decision to enter that fight and despite the conflict in Ukraine and sanctions levied against Russia, one of the roles largest oil producers. And then there's the fight between Islamist militants and the government in Libya, a significant oil producer. So why are petroleum prices falling?

ROBIN WEST: There are two factors to keep in mind. One is supply and one is demand.

YDSTIE: It is that basic, says Robin West, a senior advisor at IHS Energy Insights.

WEST: Frankly, the global economy is slow. Demand is low.

YDSTIE: The international Energy Agency made that point last week when it said, a weaker economic outlook in China and Europe is causing a remarkable slowdown in global demand growth for oil. And West says demand is declining as global supplies serge due to the energy boom in North America, including shale oil production from North Dakota and Texas.

WEST: There's another 3 million barrels a day that's coming into the market and staying in the market. And this has really changed the global supply-demand balance very substantially.

YDSTIE: And it's helping bring more stability to the oil market. Michael Levi, a senior fellow for energy and environment at the Council on Foreign Relations, says it is true. The surge in North American production has added significantly to global supplies. But he doesn't believe it's responsible for the decline in oil prices during the past three months.

MICHAEL LEVI: I think the U.S. oil boom has helped stabilize prices over the last few years. But that's because it's been a surprise, and it no longer is a surprise. And that leads me to conclude that people are expecting too much from it, in terms of stabilizing oil prices in the future.

YDSTIE: Levi says the added production from North America has lulled market participants into believing they're in an era of stability.

LEVI: I think there is excessive complacency in the ability of the global oil market to absorb disruptions that we haven't seen yet.

YDSTIE: Levi says there are good reasons the current conflicts haven't pressured prices higher. Serious production is minimal. Libya's has been impaired for some time. And sanctions against Russia would hurt production off in the future, not current production.

LEVI: On the flipside, no one expects Vladimir Putin to cut his own oil exports in order to inflict harm because he can't sustain his spending - his state - his budget without the revenues from oil cells.

YDSTIE: Fadel Gheit, managing partner and head of oil and gas research at Oppenheimer and Company, says oil prices will spike higher when severe disruptions occur. But he thinks global supply will continue to grow and keep prices in check. He says that will happen as fracking technology improves, reducing the costs of production.

FADEL GHEIT: The break-even point continues to decline. I mean, yes, we needed $80 oil for the North Dakota bargain oil development to continue. Now it's about 65. Five years from now, it could be 50 or even 40.

YDSTIE: Gheit argues that will lead to a long-term decline in the price of oil - a decline that we're already beginning to see. John Ydstie, NPR News, Washington.

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