• Keeping a Cap on Oil Prices
  • The Auto Sector May Be Leaving the Fast Lane
  • Russia, Recovering from the Rubble

I grew up in the city and my wife grew up in the suburbs. We had the briefest of conversations about where we would locate after our wedding—and ended up about a mile from her family home. That story clearly illustrates who has the true power in our relationship.

The move added a degree of difficulty to my daily commute. Instead of hopping on a bus at the nearest street corner, I had to walk a mile to take a commuter train. The monthly pass cost twice as much, which challenged our meager finances. Matters got worse when the price of the ticket doubled seemingly overnight, the result of a spike in the price of fuel.

The oil markets have evolved dramatically in the generation since then. The Organization of Petroleum Exporting Countries (OPEC) has lost its grip on global production, with the United States (among others) rising to become a significant source of output. The new dynamic has been on prominent display so far this year, bringing important consequences for countries and central bankers.

The oil “bust” that began in the summer of 2014 saw the price of crude fall from over $100 per barrel to less than $30 at the beginning of last year. The realignment was extraordinarily painful for oil producers. The number of active U.S. rigs fell by 80%, and countries overly reliant on energy revenue fell into hard times.

The drivers of the fall were many and varied, but they all come back to demand and supply. World demand for oil has grown only moderately; China’s growth is slowing, and the pace of expansion in the developed world remains modest. Energy consumption among major oil producers also slowed, as their economies were hindered by lower oil revenues.

On the supply side, OPEC no longer has a stranglehold on output: half of the top ten global producers (Russia, the U.S., China, Canada, and Brazil) are not OPEC members. Divergent agendas within OPEC have made supply restrictions hard to design and enforce.

There was widespread suspicion that Saudi Arabia, which has a huge reservoir of proven reserves, had engineered (or at least tolerated) the glut to hinder marginal producers. Falling prices made it uneconomical for some to bring crude out of the ground and hampered the fiscal health of Saudi Arabia’s rivals. Estimates suggest that most of the world’s major producers need a price of more than $60 per barrel to balance their budgets.

Low prices had the desired effect. Iran’s ascent slowed, and the U.S. shale industry endured a significant retrenchment. Investment and employment in the American energy sector diminished sharply, and some firms in the industry defaulted on their debts.

But inexpensive oil also challenged the kingdoms of the Middle East. And so last fall, OPEC crafted supply restrictions. Russia pledged its cooperation, adding credibility to the pact. Prices quickly moved above $50 per barrel, but they have not been able to advance much further.