Oil Supply Swells Driving Prices Down 2015-01-08

The price of oil has continued to drop, reaching its lowest levels in more than five years. Many experts say one main reason is that oil supplies are high. Carl Larry is an oil and gas expert for the United States consulting company Frost & Sullivan. He noted the big increase in U.S. oil production in recent years. But, Mr. Larry added that many experts did not expect the increase in production.

"If you were talking to any oil analyst, myself included, just three years ago, nobody would have predicted that we would practically double our production by next year."

Today, the U.S. is the world's top oil producer.

"We're producing 8.6 million barrels a day in America that's up nearly 4 million barrels a day from just three years ago."

However, while the U.S. needs to import less, major exporters are not reducing their oil output. This has caused world supplies to swell. One example is Saudi Arabia, the world's top oil exporter. This week, Saudi Prince Salman read a speech from King Abdullah. He said the kingdom would continue with its current policy of pumping oil instead of cutting production.

The effects of low prices have spread around the world. Reduced oil profit is blamed for the sharp drop in the exchange value of Russia's money, the ruble. Venezuela is also a major oil exporter and a member of the Organization of Petroleum Exporting Countries. That nation's president, Nicolas Maduro, visited China this week in an effort to get financial assistance in exchange for oil. Venezuela's economy is in a recession and inflation remains high.

Since June, big exporters used to high oil prices have seen a sharp drop in earnings related to oil sales. Benchmark Brent crude oil is below $50 dollars a barrel. Futures, financial instruments meant to protect buyers against price changes, are selling oil at about $47 a barrel. That is a drop of about 50 percent in the past three months.

Carl Larry says high demand in the U.S. has not affected prices because of the huge increase in domestic production. At the same time, economic activity in places like Europe and China has been slow. Additionally, oil that, in the past, would have been imported by the U.S., now has no buyers. Carl Larry calls the situation a "perfect storm."

"So you have this perfect storm outside of the U.S. that's causing these prices to come down really hard."

Not every country has a problem with lower oil prices. The Asian Development Bank says the oil price drop gives area governments a chance to make reforms. That means cutting costly government subsidies or financial assistance. The Asian Development Bank says Asia's developing economies could add half a percent to growth while limiting inflation this year.

Carl Larry believes that such high supply means some exporters will need to make adjustments, like cutting production. He says only the OPEC countries, or possibly Russia, are in a position to do that.

"Somebody has to make adjustments. And right now, it looks like it's going to be on OPEC, unless we see some action from Russia."

I'm Mario Ritter.

VOA's Victor Beattie provided material for this story. Mario Ritter wrote it for Learning English. Caty Weaver was the editor.

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Words in This Story

consulting-n. the act of providing consultation or advice

practically-adv. almost, nearly all

swell-v. to increase, to become bigger

domestic-adj. in the home country, at home

adjustments-n. small changes to improve how something works or to get better results