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Price cuts are good for consumers, but markets don't like volatility.
The sharp decline in oil prices is a simple case of economics 101, in particular the laws of supply and demand.
Brent crude oil prices surged from a low of US$20 a barrel in 2001 to US$128 a barrel in 2011.This led to a sharp increase in exploration and production while consumers sought ways to become more energy efficient and reduce their reliance on high priced oil.
The development of more fuel-efficient aircraft has been a good example of this.
Fuel conservation has reduced the demand for oil as new production came on stream. Thus, an excess of demand over supply in 2010 and 2011 quickly became an excess of supply over demand. As a consequence, oil prices have plunged.
The rapid transformation from excess demand to oversupply has had an impact on many commodities, including dairy, and has resulted in a sharp decline across a wide range of commodity prices.
The accompanying table shows that global oil supply has increased from 85.1 million barrels a day to 96.4 million since 2005. This totally contradicts Hubbard M King's Peak Oil Theory, which he developed in the 1950s.
King, who received a PhD from the University of Chicago and studied petroleum reserves and production patterns, predicted that US oil production would peak between 1966 and 1972. He was correct in the short term but the development of fracking techniques has resulted in a substantial increase in the country's oil production, from 8.3 million to 15.1 million barrels a day since 2005.
The United States is now the world's largest oil producer and accounted for 60 per cent of the increase in world supply between 2005 and 2015.
Saudi Arabia is the second largest producer and Russia is third.
The Saudi Government introduced an austerity budget in December and the IMF is forecasting GDP growth for the kingdom of only 1.2 per cent in 2016 while the Russian economy is under huge pressure because crude oil accounts for nearly 60 per cent of the country's export receipts.
The Brazilian economy is also under pressure because crude oil represents 11 per cent of exports and iron ore and sugar, which represent 9 per cent and 4 per cent of exports respectively, have also experienced major price falls.
Venezuela, with 95 per cent of its overseas income derived from oil, is experiencing its worst recession since the 1940s with its economy contracting by nearly 10 per cent in 2015.
Political conflicts also have a significant impact on supply as Iraq's output has increased sharply since the reduction in hostilities but conflicts in Libya and Syria have led to significant output reductions.
But the biggest change over the past few decades has been the declining influence of Opec (Organisation of the Petroleum Exporting Countries). Opec's share of world production has fallen from 41.6 per cent in 2005 to 40.5 per cent in 2010 and 39.1 per cent in the latest period.
Opec introduced production cuts to raise prices in the past but it hasn't adopted this policy recently for a number of reasons including:
• Its influence over the market has declined.
• Saudi Arabia, which dominates the 13-member cartel, is much more interested in maintaining market share.
• Higher prices would encourage more shale oil developments in the United States which is not in the Saudis' best interest. Opec's best option may be to keep prices low and force US shale oil producers out of business, a development that would have a positive impact on prices in the medium to longer term.
• Iran, an Opec member, has been increasing production following the removal of sanctions.
On the demand side, there have been huge efficiency gains, particularly in the airline industry.