regulatory challenges on emissions
and the high fuel costs associated with
high oil prices. While increased demand
might be expected if prices remain low,
legislation, decarbonization efforts,
and vehicle efficiency gains all point
toward long-term demand contraction.
There continues to be limited impact
on production from the geopolitical
tensions in the Middle East. While parts
of Iraq are now occupied by ISIS and
Libya’s production has all but ceased,
there hasn’t been any significant recent
major supply disruption. Output by the
Organization of the Petroleum Exporting
Countries (OPEC) has exceeded 30
million barrels per day every month
since December, and Iraqi supply has
surged to 35-year highs, despite the
military operations underway in the
country, offsetting losses in Libya.
Historically, OPEC has cut production
to arrest falling prices, but this time the
cartel has stated that it will not do so.
In practice, among OPEC countries it
has generally only been Saudi Arabia,
the lowest cost major oil supplier,
that has actually cut production.
In the short run it suits Saudi Arabia to
have lower prices, which reduce supply
from higher cost producers. But price
volatility also suits the Saudis because
new investment projects have higher
risk profiles and lower profitability, if they
are profitable at all, during such periods.
The last thing that Saudi Arabia wants in
the long run is for the supply/demand
imbalance to worsen as new investment
improves supply while demand
continues to fall, so it really should be no