The oil industry is full of economic booms and busts. As of October 2015, the industry is in a downturn, and the price of crude oil has dropped significantly. Earnings are down for companies that have made high profits over the past five years, and these companies have responded by decommissioning half their overall rigs and cutting investments in exploration and production.

The cause of the downturn is the declining price of a barrel of oil, which is due to the strong U.S. dollar, OPEC, oversupply, declining demand and the Iran nuclear deal. Prices have been cut in half in less than a year, reaching lows that people have not seen since the last global recession. Prices have recovered periodically in 2015, but many oil executives believe it will be years before oil returns to $100 per barrel.

The Strong US Dollar

The strong U.S. dollar has been the main driver for the price decline of crude oil over the last few years. In fact, the dollar is at a 12-year high against the euro, leading to appreciations in the U.S. dollar index and a reduction in oil prices. This puts the market under a lot of pressure, because when the value of the dollar is strong, the value of commodities falls. Global commodity prices are usually in dollars and fall when the U.S. dollar is strong. For example, the surge in the dollar in the second half of 2014 caused a sharp fall in the leading commodity indexes.

Organization of the Petroleum Exporting Countries (OPEC)

Another leading factor in the sharp price drop of crude oil is that OPEC, a cartel of oil producers, is unwilling to stabilize the oil markets. Prices of OPEC’s benchmark crude oil have fallen 50% since the organization decided against cutting production at a 2014 meeting in Vienna.

Of the participating countries in OPEC, Iran, Venezuela and Algeria have wanted to cut production to firm up prices. Saudi Arabia, the United Arab Emirates and other Gulf allies refuse to do so. Iraq sits alone as the only OPEC country to not only maintain supply but actually increase it. If OPEC does not cut production, the result is a further oversupply of oil, placing downward pressure on crude oil prices for the long term.

Oversupply of Crude Oil

Crude futures declined in late September 2015 given that the global oversupply is increasing oil stockpiles. Total oil production by year-end 2015 is expected to rise to over 9.35 million barrels per day, higher than the 9.3 million barrels per day forecasted in February 2015. This shows that not only is the market oversupplied, but supply is actually increasing.

Unrelated to futures, oil inventories have risen more than expected. The Energy Information Administration (EIA) reported on Sept. 30, 2015, that U.S. commercial crude oil inventories rose by 4.5 million barrels from the previous week. At almost 500 million barrels, U.S. crude oil inventories are at the highest level in at least the last 80 years, causing a decline in prices.

Declining Demand

While supply is increasing, demand for crude oil is decreasing. The economies of Europe and developing countries are weakening, and at the same time, vehicles are becoming more efficient, which has caused the demand for fuel to lag. China's devaluation of its currency suggests its economy may be worse off than expected. With China being the world's largest oil importer, this is a huge hit to global demand.

Iran Nuclear Deal

The Iran nuclear deal is a preliminary framework agreement reached between Iran and a group of world powers. The framework seeks to redesign, convert and reduce Iran's nuclear facilities. The U.S. nuclear deal with Iran allows more Iranian oil exports. The deal removes Western sanctions against Iran, and investors fear it will add to the world's oversupply of oil. Markets have already reacted to this news by decreasing the price of crude oil.

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