Insight: TurmOIL in the market

With the commotion in the Middle East, where ISIS is threatening oil production, with Libya producing less and Russia threatening with sanctions, one might wonder why the current oil price isn't soaring high. In June the price for 1 barrel of oil was $111.80 compared to $101.61 in August, a sharp fall in the oil price. The oil price is established by means of supply and demand. Demand has not been lowered as a result of the commotion in the Middle East and Russia. On the other hand, the world supply of oil has been increased recently, mainly by the US with the use of shale oil. Also the production costs of one barrel of oil have been reduced due to new technologies, causing oil barons to drill deeper while they can now still make a profit. Often however, when there is turmoil in large oil producing countries, we see a sharp increase in oil prices. Then why does this not happen now? First of all, the lack of supply from Libya has already been reflected in the oil price recent years. Second, when there is turmoil in the Middle East (such as the threat of IS in Syria now), people tend to judge every country in the Middle East as an important supplier of oil. This is not the case for countries like Syria. They do produce oil, but their market supply is relatively small compared to the world market supply, hence the lack of supply from Syria will not cause a major shift in the oil price. Third, Russia is heavily depending on the profits of selling oil. The market does not expect Russia to limit oil supply simply for the reason that the Russian government can not do without the oil profits. Therefore, a fall in supply of Russian oil is very unlikely, so the Russian commotion will not cause an increase of the world oil price. All in all, we see that the current commotion in the world is not really threatening oil supply, while new drilling technologies improve oil supply, causing the oil price to fall.