When the market closed on 9^th Jan, the crude oil ended with a price of USD $48.36. This was almost 50% its value from a year ago in Jan 2014. Before taking an attempt to reason out the cause for such a plunge in its price, it is important to understand that there was no one reason for the cause of it and that it could be the accumulation of the different causes that made the oil price plunged. The obvious reason behind the fall in oil prices is due to the shift in supply and demand as according to the principle of economics. When supply far exceeds the demand, prices tend to fall. However, it may be far more complicated than simple economics involved.

A year ago, Russia’s provocation on Ukraine prompted the United States, along with the European Union to apply sanctions against individuals and businesses from Russia. This was to corner Russia to retreat from creating chaos in Ukraine. Russia did not took the bait and instead responded with sanctions with a total ban on food imports from the EU, US, Norway, Canada and Australia. To date, Russia still hasn’t retreat and it seemed that things are getting out of hand.

The fact that Russia’s economy over rely on the energy sector only expose its vulnerability to its enemies. It has been said that the US and Saudi Arabia are attempting to cripple Russia’s economy by driving down oil prices. Inevitably, both countries must be prepared to face some collateral damage on grounds that Russia would suffer even more. But the worst has yet to come. It would be a phenomenal disaster if oil prices continue to slide further as the US and OPEC stand aside and watch. Businesses and individuals who borrowed heavily on the hope that oil prices would rebound will be hit hard. But the ones who suffer the most would be the countries where that depend on high oil price to pay for expensive social programmes. These included Russia and Iran.

For how long can this disaster go on? A recent interview with the Middle East Economic Survey (MEES) a month or two ago revealed that Saudi Arabia’s oil minister Ali al-Naimi declined to cut production despite a slide in prices. “As a policy for OPEC and I convinced OPEC of this, it is not in the interest of OPEC producers to cut their production, whatever the price is. Whether it goes down to $20, $40, $50, $60, it is irrelevant,” he said. However, just last week Algeria, one of the smaller OPEC members became the first to call on OPEC to cut production. Youcef Yosfi, the Algerian Oil Minister, broke ranks and publicly petitioned OPEC to cut production to stabilize and raise prices. It seemed that the effect of plunging oil prices was being felt globally and it certainly isn’t a good idea to stand aside and watch the oil price continue to fall further.

Yet although OPEC seemed to be retreating, the US shale revolution perhaps has a stronger say for a return of stable pricing. Because shale oil is relatively costly, production can be turned on and off easier and cheaper than conventional oil production. In a competitive market shale could shut off when demand is weak and turn up when demand is strong. This means that shale productions could be the one affecting productions in global oil market instead of the Saudis. And as the US producers increase market share, price-fixing becomes more difficult for the OPEC.