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Last year in June, the price of Brent crude was more than $100. By December, it had fallen more than half. Oil has plunged nearly 55 percent in value since June, when Brent traded above $117 a barrel and U.S. crude above $107.

Should OPEC cut back on its oil production?

As prices slid, many observers waited to see whether OPEC, the world’s largest oil monopoly, would cut back on its production to push prices up. But OPEC did nothing. The imminent fall in the price of crude oil, due over supply, should have triggered the production to decrease. But the key members of OPEC fell silent.

Or should US take a step back?

But the decline is not all good news. Sustained low prices could begin to “really hurt energy company stocks” says CNN, and are affecting jobs as well.
“Falls in oil prices are going beyond many people’s expectations. This will put pressure on the earnings of US energy firms,” said Hirokazu Kabeya, senior strategist at Daiwa Securities

Why are the oil prices falling?

Saudi Arabia didn’t want to give up market share, and it hoped that lower prices would help throttle the US oil boom. So oil went into free-fall. The demand for crude oil is bound to fall with the recession in Europe and falling factory output in China. The recent restart to production by Algeria, Iran, Iraq and Libya means that the world is already producing excessive crude oil. The astonishing rise of oil production in the USA means that America is increasingly self-sufficient in oil. When supply exceeds demand a fall in the price of any product is inevitable.

What to expect in 2015?

Opec’s Secretary-General Abdullah al-Badri told Reuters on Sunday that he hoped to see a recovery in the price of oil by the second half of 2015.
“We hope the price would rebound by the end of the second half of 2015,” he said. “We can’t see the market now, we have to wait until the end of the second half of 2015 to see how the market [will] react to these low prices.”

The price of the product depends on the demand and supply.

1) If the demand is more than the supply, the price of oil will rise. This will make extraction from inhospitable locations also possible.
Because of this, more of the world’s oil becomes profitable and more is extracted. Then we reach an equilibirium where the supply rises to meet the demand.

2) Now if the supply exceeds the demand, the price wil fall. If the prices fall below the production costs, the extractors at high cost locations will perish. This will again decrease the supply and the price of oil will rise again.

What do you think about the falling crude prices? How is it affecting the global economy? When will it stabilize? Share your thoughts below.

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