After a mini rally, oil prices are falling again. From $62 a barrel 10 days ago, Brent crude has slipped to $58.43 on Tuesday.
It may not seem like much of a cut after the collapse in world oil prices that sent Brent tumbling from $115 to $45 a barrel between last June and January, but it is still significant.
The reason this turn in the price of oil matters can be seen in every corner of the world economy: when fear of a new cold war or a eurozone break-up hangs over every corporate and government decision, cheap energy lightens the load.
Manufacturers have benefited from cheap imports of oil. Households have more spare cash after lower costs at the pumps. There are unwelcome side-effects, not least for oil producers, and nothing written here takes into account the climate change effects, but for the developed economies it is a boon.
Many economists expected last year’s slump to prove temporary. The forecast rested on the assumption that a low oil price would force out firms involved in costly extraction. In particular, they said, the fracking derricks scattered across the American prairies would become unviable at $50 a barrel.
And they were right that fracking rig owners would shut down. The number of closures has increased dramatically since last autumn, when it first became obvious that oil would soon be as cheap as it was in the aftermath of the 2008 banking crisis.
But they were wrong that this alone would squeeze the supply of oil to such an extent that prices would start to rise.
Analysts have pointed out that the fracking rigs left in operation have become more efficient – extracting more oil and gas out of the ground than before. US oil production is around 9.2m barrels a day compared with 8.5m last summer, according to the Washington-based Energy Information Administration, based on weekly data.
More importantly, the countries outside Opec (which has maintained output levels) are pumping more oil to make up for lost income. Russia is a case in point.
Oil hoarding is another factor and convinces traders that any rise in the price can be quickly reversed by someone with a storage tank turning on the tap. Hoarding has been going on since the financial crash and has reached new highs in recent months. The hoarders are not just hedging against another jump in prices, but also taking out an insurance policy against a decision to restrict the flow of oil for use in manufacturing as much as transport and heating.
US crude stockpiles grew by nearly 5m barrels to 417.9m barrels earlier this month, according to government figures.
So looking ahead, should prices start to climb again, the ceiling will be much lower than the $110 price common from 2009 onwards. And the carbon-fuelled growth that most economies rely on will continue for a little while yet.
