Global Oil Prices: What's Behind the Drop?

In the summer of 2014, global oil prices began what would become one of the sharpest rates of decline in years.  By January 2015, global oil prices plunged to the lowest values since the depths of the 2009 global recession. After only a slight reprieve, August rolled around and Brent, a global oil price benchmark grade, was trading still lower at around $49 per barrel, a roughly 55 percent decrease since July 2014. The American benchmark crude oil, West Texas Intermediate (WTI), was trading at about $42 per barrel, a 60 percent decline during the same period. 

According to a World Bank Policy Research Note published in April, the plunge in global oil prices was set in motion by a confluence of several factors:

• the US shale gas boom has created an enormous gap between the prices for natural gas and crude oil in terms of energy equivalence;
• the fast rise of US unconventional crude oil production, development of alternative fuels, and energy efficiency gains;
• weak demand in Europe due to its debt crisis and sluggish economic growth;
• increasing supply from OPEC coupled with expectations of still greater supply from the Middle East if a nuclear deal with Iran is reached;

Together these factors have created an oil glut, the effects of which have been compounded by the broad appreciation of the US dollar.  According to the World Bank Note, "Empirical estimates of the size of the U.S. dollar effect cover a wide range: the high estimates suggest that a 10 percent appreciation is associated with a decline of about 10 percent in the oil price, whereas the low estimates suggest 3 percent or less [...] The role of U.S. dollar appreciation - triggered by diverging monetary policies in the United States, Euro Area, and Japan - was an important contributor to the latest decline in commodity prices." (p.14)

Take a closer look at each of the factors discussed by the World Bank with the comprehensive data and visuals provided in this series of dashboards by Knoema.

🏠                           US Shale Gas Boom        US Oil Production and Alternative Fuels        Global Oil Glut        US Dollar Appreciation