The end of oil price volatility

Oil supplies from the Middle East have been savaged by violence, sanctions and instability. Libya, home to Africa's largest oil reserves, has cut exports by 80% since its ports fell into the control of militias last year. Sanctions have cut 1.5m barrels of oil a day from Iranian exports while strife in Iraq, Venezuela and Nigeria has cost hundreds of thousands of barrels a day in production. All up, about 3.5m barrels of oil from these regions has been stricken from global supply.

Yet oil prices have fallen. In fact, the past four years have seen the most stable prices in recent history. How is that possible with so much conflict and strife? There is a new force in global oil: North America.

Together, the US and Canada have added more than 4m barrels a day to global supply. America is now the world's largest oil producer, overtaking Russia and Saudi Arabia earlier this year. It now produces more than 10m barrels of oil a day.

The shale revolution is a familiar story by now. What is new is its effect on prices. Shales are unlikely to produce a glut and force a price crash because the cost of production is high. They could, however, banish price spikes and panics of the past.

Unlike conventional wells, drillers in US shales know where the oil is and don't need much cash to get it out. As soon as prices start rising to make new drill locations economic, they rush to produce more. Whereas conventional fields take years or even decades to respond to higher prices, new shale wells can start pumping oil within days. American shale producers are the stabilising force in global oil markets.

This has important implications for both prices and producers. Wars, sanctions and panic may no longer create price spikes. Instead, we could see a long period of oil price stability. This will be good for consumers of energy but producers expecting higher prices and super profits should be wary.