Why Are Oil Prices Falling?

Saturday, November 15, 2014

"Oil prices need to stay above $85 a barrel in order for new fracking investment to be worthwhile," says anchorwoman Trish Regan.

Today's Brent Crude is $77.74 a barrel.

In USA Today, Regan writes, "Despite increasing tensions in the Middle East, the nationwide average for a gallon of gas stands below $3 for the first time in four years — a roughly 20% drop from June levels. And OPEC, the oil-producing group that controls an estimated 40% of world supply and aims to keep oil prices as high as it can, seems to be just fine with that."

The question is: Why?

Because that's what monopolies do when begin to face competition: Drop the price and try to put the competition out of business. Oil analysts seemed surprised last December when Saudi Arabia elected to keep their oil production at a high level even when new oil from Iran, Libya, and the U.S. were flooding the market.

But the most likely, rational reason to maintain high production is to drop the global price of oil. Saudi Arabia's oil is very cheap to produce — it's the cheapest in the world. It costs them less than $5 a barrel to produce. So even with lower prices, they're still making money. That isn't the case with the fastest-growing oil producer (and therefore biggest competitive threat), the USA.

"At a recent oil industry event in London," writes Regan, "OPEC's Secretary-general Abdullah al-Badri told reporters, 'If prices stay at $85, we will see a lot of investment going out of the market. About 65% of the producers, they have high costs. Not OPEC.'"

They're looking at the long term. If they hold prices low for awhile, maybe U.S. production will crash. Then they can go back to gouging the world in peace.

Regan concludes with an acknowledgement that lower oil prices are great for the economy, but we should "maintain investment in all forms of alternative energy."

That doesn't go far enough. We don't merely need "alternative energy," we need something more specific: Competition in the fuel market. Not weak competition, but vigorous, robust competition, which can only happen if individual cars can burn multiple fuels. It would not be difficult to accomplish and it would cost very little. But it would shield us permanently against OPEC's monopolistic manipulations.

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