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Oil Prices and the Economy: What Happened to Oil Prices over the Past Year?
The relatively rapid and largely unforeseen decline in the price of crude oil caught many, if not most, analysts by surprise. So what was behind the fall in price? Laurel Graefe, director of the Atlanta Fed's Regional Economic Information Network, addressed that topic recently.
Transcript
Between mid-2014 and early 2015, crude oil prices declined by more than 50 percent, and I think it was something that even the most prudent of analysts wouldn't have been able to expect the magnitude or the speed at which prices declined. It really was due to a number of factors. It's hard to pinpoint just one that was responsible for the decline. On the demand side, we've seen disappointing global growth, both coming from European economies and also emerging markets that have helped to dampen a bit of demand coming from those areas, as well as ongoing investments in energy efficiency that have continued to decrease the energy intensity of global GDP. It's about half what it was in 1970. So on the demand side, we're seeing quite a bit lower expectations for the progress of demand growth over time.
But I would say probably even a larger impact is coming from the supply side, where the landscape has totally shifted over the past few years, largely as a result of technology investment. Fracking technology, horizontal drilling, other types of advancements that have allowed, particularly in the U.S., producers to access tight oil, have really shifted the global balance of oil. Not only consistently have we seen tight oil production outpace expectations since 2011 every single year, we also have seen forecasts for future production to increase as well, and I would say that shifted landscape, along with the failure of OPEC to pass reductions in production limits, really helped to dampen oil prices recently.