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This Is Why The Price Of Oil Is Crashing

The price of oil has dropped nearly 40% in six months, and nobody can pin down exactly why that is. And it's got a lot of countries feeling nervous.

Posted on December 15, 2014, at 10:38 a.m. ET

On Monday morning, Americans woke up to find that their dollar could buy more in Russia than ever before, with a single dollar able to buy 60.46 rubles.

Holy crap. After breaking through 60, the Ruble is just falling apart

Joseph Weisenthal@TheStalwartFollow

Holy crap. After breaking through 60, the Ruble is just falling apart

7:48 AM - 15 Dec 14ReplyRetweetFavorite

The biggest cause of that shift? The corresponding collapse in oil prices over the last few months.

Ismail Zitouny / Via Reuters

Since June, the price of crude oil has gone from around $115 per barrel to less than $60 USD as of Monday morning.

Demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other fuels. Second, turmoil in Iraq and Libya — two big oil producers with nearly 4m barrels a day combined — has not affected their output. The market is more sanguine about geopolitical risk. Thirdly, America has become the world's largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply. Finally, the Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. They could curb production sharply, but the main benefits would go to countries they detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves. Its own oil costs very little (around $5-6 per barrel) to get out of the ground.

Making matters more unpredictable, oil's main cartel — OPEC — isn't about to step in anytime soon. As recently as Sunday, OPEC Secretary-General Abdallah Salem el-Badri said members would not shore up oil's prices by cutting supply.

OPEC Secretary-General Abdullah al-Badri
Heinz-Peter Bader / Via Reuters

OPEC Secretary-General Abdullah al-Badri

Because OPEC produces around 40% of the world's oil supply, that decision to leave things as they are carries a lot of weight.

Right now, OPEC countries have a combined target set to produce 30 million barrels of oil per day. At the group's last meeting in late November, they decided to keep to that target, even as prices continued to fall. In fact, they wound up collectively pumping almost a half a million barrels above the target last month, Bloomberg News believes.

Here's the thing: A lot of countries that mainly export oil tie their budget to its market price, needing it to be a certain cost to break even. As this chart shows, at less than $60/barrel, a lot of these countries are in for a world of fiscal pain.

Deustche Bank / Via etf.deutscheawm.com

Such a low price has produced scary looking charts like this one, which shows how the Russian ruble plunged in value this year.

Alex Kliment, an analyst at the Eurasia Group, explained to BuzzFeed News via email just why Russia was letting the ruble drop so much. It's complicated, but the short version is that countries that don't fix their exchange rate — like Russia — can let their currency's value slide around. In this situation that makes sense because while oil is sold in dollars, the Russian budget is kept in rubles, so dropping the value of the ruble against the dollar lets Moscow keep the budget all nice and orderly.

So while the budget will remain technically "balanced" this year, Kliment said, the slide will likely cause "higher inflation because foreign goods become more expensive and Russians rely on foreign imports for a lot of food and consumer goods; as well as increased debt burden on companies that have dollar-denominated debt; capital flight." Then there's the matter of next year's budget, which is a whole other thing.

But as Slate points out, there's also a breakeven price when it comes to returns on investments for drilling. In the Middle East, it's low because it's easy to drill.

Via slate.com

In places like the U.S. where the boom has been thanks to fracking? Not so much. And so while it's been a relief at the pump, the effect on the overarching economy could be bad.

Tom Mihalek / Via Reuters

So for those keeping track: Oil is plummeting, OPEC isn't doing much to change that, the U.S. could be helped or hurt by this, and it's wreaking havoc on the currency markets as countries scramble to plug their budget gaps.

Yuya Shino / Via Reuters

All of which leaves a lot of analysts and economists just like: ¯\_(ツ)_/¯

Disney/Marvel Entertainment / Via s1146.photobucket.com

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