Oil Prices Plummet.. Why And What Does It Mean?

I had mentioned previously that the decline in manufacturing in China has led to significant declines in oil consumption. This has led to a glut in the oil supply, leading to a reduction in oil prices.

Since beginning this article, Brent Crude oil prices have taken the steepest cut in history. Meaning since that benchmark was established in 1985.

A complex issue. Oil production and prices are a complex balance of cooperation and competition between oil producing countries. Too much oil produced leads to prices plummeting to the point where it becomes more expensive to produce than profits made. Too little oil production leads to shortage conditions and global inflation. The breaking point for each country is different between cost and profit.

OPEC. Historically, this balance has been roughly maintained by OPEC, though the balance has not been fair to all members. To be honest, complete fairness would be next to impossible, adding to the complexity. Primarily, OPEC has been dominated by Saudi Arabia and decisions made by OPEC customarily favor the Saudis.

OPEC+. There is also a coalition of non-OPEC nations, commonly referred to as OPEC+, which commonly follow the decisions made by OPEC. Those decisions generally include whether member nations will reduce or increase oil production for the purpose of regulating oil prices to oil consuming nations. Russia is a member of OPEC+.

The US does not coordinate. One major point to note here. While the US is now the world leading oil producer, the US is not a member of OPEC or OPEC+. The US attempts to regulate oil market prices and conditions via political, economic and military force, as opposed to any form of cooperation or coordination with other oil producing countries. That force includes sanctions against Iran, Russia and Venezuela. The US also seizes control of much of the oil produced in Syria and Iraq.

Petrodollar. Another key point to keep in mind is that the value of the dollar largely depends on the petrodollar system, a system which I have written repeatedly is on the decline as other nations adopt alternative currencies for oil trade, bypassing the dollar. While the petrodollar system has been instrumental in establishing a common currency for oil trading, that is largely a matter of convenience. Multiple countries have made overtures of establishing a common currency for international trade, independent of any sovereign…