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With Turmoil Roiling Abroad, Why Aren't Oil Prices Bubbling Up?

A soldier guards a pipe en route to the Kawergosk Refinery near Irbil, the capital of the autonomous Kurdish region of northern Iraq, in July. Fighting in northern Iraq forced the closure of the country's largest oil refinery, Baiji, and cut production from the Kirkuk oil field this summer. (AFP/Getty Images)

The price of oil has been falling — a drop that you may already have noticed at the pump. Gasoline prices have dropped noticeably since June, and oil is now well below $100 a barrel.

That decline has happened even as conflicts have flared in or near oil-producing regions. Normally, oil prices are expected to spike higher amid turmoil — so why have they been trending lower?

The global price did rise to just under $112 a barrel in June, when ISIS first swept into northern Iraq. But the price of crude has trended down since then — despite the U.S. decision to enter that fight, despite the conflict in Ukraine and despite sanctions levied against Russia, one of the world's largest oil producers, for its role there.

Then there's the fight between Islamist militants and the government in Libya, a significant oil producer.

So why, then, are petroleum prices falling?

"There are two factors to keep in mind," says Robin West, a senior adviser at IHS Global Insight. "One is supply, and one is demand."

It really is as basic as that, West says. "Frankly, the global economy is slow. Demand is low, and so there's very little growth in demand. And so, supply is strong, and demand is fairly week."

The International Energy Agency made that point last week, when it said a weaker economic outlook in China and Europe is causing a remarkable slowdown in global demand growth. And demand is declining, West says, as global supplies surge due to the energy boom in North America — including shale oil production from North Dakota and Texas.

"There's another 3 billion barrels a day that's coming into the market and staying in the market," he says. "This has really changed the global supply-demand balance very substantially" — and helped bring more stability to the market.

Michael Levi, senior fellow for energy and the environment at the Council on Foreign Relations, says it is true that a surge in North American production has added significantly to global supplies. But he doesn't believe it is responsible for the decline in oil prices of the past three months.

"I think the U.S. oil boom has helped stabilize prices over the last few years, but that's because it's been a surprise," Levi says. "And it no longer is a surprise. And that leads me to conclude that people are expecting too much from it, in terms of stabilizing oil prices in the future."

Levi says the added production from North America has lulled market participants into believing they're in an era of stability.

"I think there is excessive complacency in the ability of the global oil market to absorb disruptions that we haven't seen yet," he says.

There are good reasons the current conflicts haven't pressured prices higher, Levi says. Syria's production is minimal, Libya's has been impaired for some time, and sanctions against Russia would hurt production in the future — not current production.

"On the flip side, no one expects Vladimir Putin to cut his own oil exports in order to inflict harm, because he can't sustain his spending, his state, his budget, without the revenues from oil sales," Levi notes.

Fadel Gheit, managing partner and head of oil and gas research at Oppenheimer & Co., says oil prices will still spike higher when severe disruptions occur. But he thinks global supply will continue to grow and keep prices in check.

He predicts that will happen as fracking technology improves, reducing the costs of production.

"The break-even point continues to decline. Yes, we needed $80 [per barrel] oil for the North Dakota Bakken oil development to continue," he says. "Now, it's about $65. Five years from now, it could be $50, or even $40."

Gheit argues that will lead to a long-term decline in the price of oil — a decline that we're already beginning to see.

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Transcript

ROBERT SIEGEL, HOST:

The price of oil has fallen 15 percent since June. It's now well below $100 a barrel. That drop in price has occurred at a time of conflict in and near oil-producing regions. Normally, we expect oil prices to spike at times like these. NPR's John Ydstie explains why that has not happened.

JOHN YDSTIE, BYLINE: The decline in oil prices may have already affected your pocketbook. On average, it's costing almost 10 percent less now than it was in June to fill up your car at the pump, and that's happened with conflicts flaring. The global price of oil did rise to $112 a barrel in June, when Isis first swept into northern Iraq. But since then, the price of crude has trended down, despite the U.S. decision to enter that fight and despite the conflict in Ukraine and sanctions levied against Russia, one of the roles largest oil producers. And then there's the fight between Islamist militants and the government in Libya, a significant oil producer. So why are petroleum prices falling?

ROBIN WEST: There are two factors to keep in mind. One is supply and one is demand.

YDSTIE: It is that basic, says Robin West, a senior advisor at IHS Energy Insights.

WEST: Frankly, the global economy is slow. Demand is low.

YDSTIE: The international Energy Agency made that point last week when it said, a weaker economic outlook in China and Europe is causing a remarkable slowdown in global demand growth for oil. And West says demand is declining as global supplies serge due to the energy boom in North America, including shale oil production from North Dakota and Texas.

WEST: There's another 3 million barrels a day that's coming into the market and staying in the market. And this has really changed the global supply-demand balance very substantially.

YDSTIE: And it's helping bring more stability to the oil market. Michael Levi, a senior fellow for energy and environment at the Council on Foreign Relations, says it is true. The surge in North American production has added significantly to global supplies. But he doesn't believe it's responsible for the decline in oil prices during the past three months.

MICHAEL LEVI: I think the U.S. oil boom has helped stabilize prices over the last few years. But that's because it's been a surprise, and it no longer is a surprise. And that leads me to conclude that people are expecting too much from it, in terms of stabilizing oil prices in the future.

YDSTIE: Levi says the added production from North America has lulled market participants into believing they're in an era of stability.

LEVI: I think there is excessive complacency in the ability of the global oil market to absorb disruptions that we haven't seen yet.

YDSTIE: Levi says there are good reasons the current conflicts haven't pressured prices higher. Serious production is minimal. Libya's has been impaired for some time. And sanctions against Russia would hurt production off in the future, not current production.

LEVI: On the flipside, no one expects Vladimir Putin to cut his own oil exports in order to inflict harm because he can't sustain his spending - his state - his budget without the revenues from oil cells.

YDSTIE: Fadel Gheit, managing partner and head of oil and gas research at Oppenheimer and Company, says oil prices will spike higher when severe disruptions occur. But he thinks global supply will continue to grow and keep prices in check. He says that will happen as fracking technology improves, reducing the costs of production.

FADEL GHEIT: The break-even point continues to decline. I mean, yes, we needed $80 oil for the North Dakota bargain oil development to continue. Now it's about 65. Five years from now, it could be 50 or even 40.

YDSTIE: Gheit argues that will lead to a long-term decline in the price of oil - a decline that we're already beginning to see. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.

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