Despite Latest Saudi-Iran Conflict, Oil Prices Drop Oil prices have declined even though tensions have risen between the 2 oil producers. That would have been unthinkable years ago. An oil glut due largely to U.S. production changed the price equation.

Despite Latest Saudi-Iran Conflict, Oil Prices Drop

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We are monitoring the ongoing tension between two rival Middle East powers. And we are reminded of how difficult it is to predict anything in this region these days. Things have been very tense between Saudi Arabia and Iran after the Saudi government executed a Shiite cleric. Both of these nations are big oil producers. And in the past, a simmering conflict like this would have led to a spike in oil prices. Instead, though, oil prices have fallen in recent days, actually sliding to an 11-year low. We asked NPR's John Ydstie to explain why.

JOHN YDSTIE, BYLINE: Oil analyst Dan Katzenberg of R. W. Baird & Co. says the mild reaction of the oil market to more trouble in the Middle East is evidence of a big change.

DAN KATZENBERG: Historically, this would have absolutely caused crude prices to spike.

YDSTIE: Because of worries, the conflict might lead to a cut in oil exports from the region. But that hasn't happened this time because of a global glut of oil - a glut largely due to the huge rise in U.S. production, says Jack Gerard. He's president of the American Petroleum Institute, an industry research group.

JACK GERARD: The market's looking at that situation, that unrest, and they're saying, well, it could have an impact, obviously, within those significant producing nations. But there's alternatives today.

YDSTIE: And the main alternative is the U.S. American production soared in recent years, after the introduction of fracking technology allowed oil to be pumped from shale formations. U.S. production peaked recently at over 9 million barrels a day. That's eroded the dominance of Mid East oil producers.

GERARD: Those who had significant influence over global pricing - if you talk to analysts, we'll tell you that that dynamic has shifted and is changing.

YDSTIE: Gerard is referring to OPEC, the group of oil exporters led by Saudi Arabia who once could set a ceiling and floor for oil prices. But the Saudi's have been pumping freely, doing their best to drive prices lower and force U.S. producers out of business. On Tuesday, the Saudi's cut prices once again, this time for sales of oil to Europe. The move was largely interpreted as an effort to keep Iran, also an OPEC member, from regaining its traditional market in Europe as sanctions are lifted this year. Dan Katzenberg says that could weaken OPEC further and send prices even lower.

KATZENBERG: I think the expectation is that you're just going to see each of these countries looking out for their best interests. And by doing that, they're going to pump at full volume.

YDSTIE: Katzenberg says that could mean gasoline prices for U.S. consumers - now about $2 a gallon - could go even lower. John Ydstie, NPR News, Washington.

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