Troubles Are Up In The Middle East, But Oil Prices Are Down. Huh?

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Prices, as seen at a gas station in Woodbridge, Va., on Tuesday, are 21 cents a gallon cheaper than this time last year. The drop violates the historic rule that tension such as that currently between key producers Saudi Arabia and Iran causes the cost of a barrel of oil to rise.

Saul Loeb/AFP/Getty Imag  Oh, the irony.

Historically, when political tensions increased in the Middle East, the price of oil rose too. Buyers of oil worried that conflicts could interrupt drilling or interfere with oil-tanker access to waterways. In theory, when risks rise, so do prices.

But in recent days, even as tensions have been growing between two key oil producing nations — Iran and Saudi Arabia — oil prices have been falling. They slipped below $36 a barrel on Tuesday.

Why?

Experts explain it this way: The two countries are both in OPEC but now are on such bad terms that they'd be unlikely to agree on anything — including a plan to reduce drilling. OPEC members are supposed to reach a consensus before changing production policies, and right now, the OPEC policy is to maintain existing high levels of pumping.

"If they can't agree on an output level and some way to control prices, then everybody will just keep all-out pumping and try to raise as much money as possible for their countries," said Daniel Katzenberg, senior energy analyst at Robert W. Baird & Co.

And there's another big reason for the low global oil prices: America's abundant supplies.

On Tuesday, American Petroleum Institute President Jack Gerard, after delivering his annual State of American Energy address, told reporters that low oil prices reflect the new U.S. role in energy markets.

These days, even when Middle Eastern supplies face possible disruptions, oil buyers don't panic; they know U.S. producers can fill any supply gaps, he said.

"The geopolitics of energy has changed significantly over the last decade," Gerard said. "The United States is now the world's No. 1 producer of oil and natural gas."

Those U.S. oil supplies are "taking out a lot of the risk that we have seen historically" in OPEC-dominated energy markets, he said.

"Our production in the United States today is around 9 million barrels a day; that's almost doubled over the last five or six years," Gerard said. "So the global market today is very different."

All of that is good for U.S. consumers, he said, noting that the U.S. Energy Information Administration says the average U.S. household saved nearly $700 on cheaper gasoline last year, compared with 2014.

And 2016 may be even better for household budgets. The nationwide average price for a gallon of regular is now $1.99, according to AAA, the auto club. That's 21 cents cheaper than a year ago.

NPR correspondent John Ydstie contributed to this report.