By Isaac Cohen*
After the Organization of Petroleum Exporting Countries (OPEC), last week meeting in Vienna, decided to leave production levels unchanged, oil prices sank below US $40 a barrel. This was not seen since the Great Recession, in 2008. However, in those days, oil prices fell because the recession cut down demand. As soon as there were signs of a tepid economic reactivation, around 2010, oil prices started climbing again. They reached more than $140 per barrel, until the summer of last year, when they started going down without remission in sight.
True, this time demand side factors, such as the slowdown in China and the strength of the dollar, also explain the fall in all commodity prices. However, within this sluggish context, supply side factors are responsible for deepening the fall in oil prices.
It all started in 2009 with the spectacular recovery of oil and natural gas production in the United Sates, due to the utilization of new technologies. The reaction by the giant oil producers, Russia and Saudi Arabia, consisted in prioritizing market share preservation, instead of curtailing production to sustain prices. Therefore, the world is in the middle of an oil glut, with the consequent fall in prices, which makes difficult to anticipate when production will start coming down.
*International analyst and consultant. Commentator on economic and financial issues for CNN en Español TV and radio. Former Director, UNECLAC.