Introductory Remarks: What’s Behind the Recent Oil Price Drop?

Abstract

The price of oil more than halved in less than 5 months since September 2014, after nearly 5 years of stability. This chapter analyzes the reasons behind the recent drop in oil prices in both the demand and supply side of the oil market. Specifically, it sheds light on one of the most important reasons in the demand side, which is coming from the monetary policy that has been neglected in most interpretations. The authors of this chapter in their earlier research (Yoshino and Taghizadeh-Hesary, Int J Monet Econ Finance 7(3):157–174, 2014) found that this latter reason had significant impact in inflating the price of oil in 2009 following the subprime mortgage crisis when the world economy was in recession. By the easy monetary policy of the United States (US) and some other developed economies following the crisis, in early 2009 a large amount of liquidity entered into the oil market, since the developed economies were in recession, so they need a safe place in which to invest. In 2014 and 2015, following the recovery of the US economy and especially its capital market, liquidities that had moved from the disordered developed economies’ capital markets to oil and commodities markets during the global financial crisis of 2008–2009 in order to keep their real values, are coming back to capital markets, hence it reduced the global oil demand sharply which pushed the oil prices down.