Michael T. Klare writes:
‘…Why this sudden plunge in oil prices? That old mantra, supply and demand, is mostly to blame. The high prices of recent years have been driven, in large part, by ever-increasing demand from China and other rapidly developing countries of the Global South. Chinese consumption jumped from 7 million barrels per day in 2005 to 11 million in 2014; comparable increases were posted by India, Indonesia, Brazil and Saudi Arabia. Production increased to satisfy all this added demand, but not always fast enough to keep up—thus explaining those high prices. Over the past six months, however, the fundamentals have shifted. The economic doldrums in Europe and tepid growth elsewhere have resulted in less than expected levels of demand, while the flow of crude from America’s shale formations has reached flood proportions, producing a glut of supply and driving prices downward.
Historically, the major oil powers have responded to falling prices by reining in production, thereby constricting supply and reversing the slide—but not this time around. Saudi Arabia, which lost market share to its rivals after pursuing this strategy in previous price declines, has chosen to keep pumping at current rates. At the same time, several producers, including Iraq and Russia, have increased their output. But with the US market inundated with cheap domestic shale oil and demand shrinking elsewhere, the Saudis and their competitors have been forced to lower prices in order to attract customers in non-US markets. Some have speculated that the Saudis also hope that low prices will force the Russians into curtailing their support for the Assad regime in Syria; but retaining market share appears to be their principal objective.
Whatever the combination of factors at work, the plunge in prices is having far-reaching consequences. For countries that depend on oil revenue to finance government operations, the price collapse has already inflicted serious damage. Major producers like Mexico, Nigeria, Russia and Venezuela have announced budget cutbacks, significantly impairing the ability of these governments to implement favored domestic and international programs. Russia, for example, is under pressure to reduce its military expenditures, calling into question its ability to undertake major military operations in Ukraine or other peripheral regions.
via The Oil Price Collapse Is Not Just Another Bust Cycle | The Nation.