Oil prices hit eight-month lows earlier this week and have fallen more than 20 percent from the year-to-date high of $110.85 a barrel set on Feb. 24. Oil is trading higher on Wednesday, reversing earlier declines of more than 1 percent.
Global energy prices have been knocked down by recession fears in both the U.S. and Europe and higher oil production in oil-rich countries like Saudi Arabia, Iraq and Libya. Saudi Arabia alone has ramped up production by 2 million barrels a day as supply from the U.S., an increasingly bigger player in oil production, has helped ease prices. The U.S. pumps 25 percent more oil today than it did four years ago and has reduced its oil exports to 42 percent from 60 percent in less than a decade.
U.S. consumers, struggling with high unemployment and a weak housing market, welcome lower energy prices, especially right before the summer driving season. The Commerce Department reported gasoline prices fell 8.9 percent in May compared to April. The average price of regular gas is $3.54, according to AAA.com's Fuel Gauge Report.
"Every $10 drop in crude-oil prices roughly correlates to an increase of 0.2-0.3 percentage point in economic growth," reports The Wall Street Journal.
Oil prices surged earlier this year in large part because of ongoing concerns by Western nations that Iran is secretly producing nuclear weapons, a charge Iran vehemently denies. Daniel Yergin, author of "The Quest: Energy, Security, and the Remaking of the Modern World" and one of the world's preeminent oil experts, says the break in prices could quickly reverse if tensions with Iran rise again. Yergin says oil prices contained a 20 percent "security premium" that began last December as negotiations stalled with Iran.
New financial sanctions against Iran go in to effect July 1 and representatives from the U.S. and Europe are meeting with Iranian officials to reach a compromise over Iran's growing nuclear program. The tough sanctions levied on Iran by the U.S. were designed to put pressure on the Iranians to comply with international nuclear laws; the U.S. has exempted more than a dozen nations including Japan, South Korea and Turkey from the new sanctions as long as these countries cut their purchases of Iranian oil.
The U.S. never expected "a 100 percent cessation of Iranian exports," Yergin says in the accompanying video, and underscores that these "heavy duty" sanctions come at a time when the European Union is banning all Iranian exports.
Secretary of State Hillary Clinton addressed the efforts by the West to stop Iranian nuclear production earlier this week. "By reducing Iran's oil sales, we are sending a decisive message to Iran's leaders: until they take concrete actions to satisfy the concerns of the international community, they will continue to face increasing isolation and pressure," she said in a statement.
The Organization of Petroleum Exporting Countries, a group of the world's biggest oil producers, meets Thursday in Vienna to discuss oil production and prices.
Yergin says oil prices "don't move in a straight line" and volatility could quickly return to the markets.
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