Understanding the Decline in the Price of Oil since June 2014

There has been much interest in the causes of the steep decline in the Brent price of oil between June and December 2014. Our analysis shows that more than half of this decline was predictable in real time as of June 2014. We attribute $11 of this predictable decline to the cumulative effects of negative demand shocks prior to July 2014 which can be traced to a slowing global economy. The remaining $16 of the predictable decline is due to positive shocks to current and expected oil production prior to July 2014. The rest of the $49 cumulative decline was unpredictable and reflected a shock to oil price expectations in July 2014 which lowered the demand for oil inventories and a negative demand shock caused by an unexpected weakening of the global economy in December 2014. These two shocks lowered the price by an additional $9 and $13, respectively.