NEW YORK (AP) – For the first half of 2014 the oil market looked just as it had the year before – and the two years before that. Oil was over $100 and drivers in the United States were paying around $3.50 for gasoline.
Economies around the world seemed to have adjusted to higher priced oil and oil companies were using high profits and debt from willing lenders to scour the world for new reserves.
There was no real hope or expectation that U.S. drivers would see a price at the pump that started with a $2 ever again.
Then, despite intense turmoil in the Middle East and an improving economy in the U.S. – things that have historically sent oil prices soaring – the price of oil went into a nosedive. In the second half of 2014, it dropped by half, to depths not seen since May of 2009 when the U.S. was in the Great Recession. By December, some drivers even saw a price at the pump that started with a $1.
What Happened
Oil reached a high for the year of $107 in late June after Islamic State fighters in Iraq seemed poised to threaten Iraq’s southern oil fields and disrupt supplies from OPEC’s second largest exporter. Then, as Islamic State’s advance was halted, and Libya ramped up its production, oil began to drift lower.
Oil slipped further in the fall as signs emerged that global demand was weakening. The plunge accelerated in late November when OPEC decided to keep producing the same amount of oil despite the low demand.
Why It Happened
Oil production in the U.S., Canada, Iraq and elsewhere had been climbing for several years, but rising demand in China and other developing nations along with sporadic outages around the world kept supply and demand in balance.
The price of oil remained remarkably steady, near $100 a barrel, for nearly four years. But U.S. oil production surged far beyond what even the most optimistic forecasts predicted. By the end of 2014, U.S. drillers were producing nine million barrels of oil per day, up 80 per cent since 2008 and the most in three decades.
At the same time, growth in demand for oil began to weaken. China, the biggest single source of oil demand growth in recent years, saw its economic expansion begin to slow. Japan slipped deeper into recession and Western Europe’s economic struggles continued. The U.S. economy – the world’s biggest oil consumer – grew nearly four percent over the summer, but efficiency measures and changing demographics in the U.S. are reducing demand for oil.
With rising global supplies and weak demand, prices dropped.
