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Classic economic theory says markets behave rationally, but the global oil market is largely an exception where emotion and politics can influence price formation as much as supply and demand. While various actors like Opec and consuming-country governments can impact prices to a certain extent, price movement in the modern oil business is bound by what the world’s major players find tolerable, says FACTS Chairman Fereidun Fesharaki.

“In the oil market there are floors and ceilings. You can’t do whatever you want because the world will not let you. The price of oil is not set by economics, it’s set by what’s tolerable. If some unnamed Opec nation said I don’t want to produce oil anymore and the price goes to $200/bbl, the US Army Corp of Engineers will come and produce it for you.”

Read additional comments from Fesharaki’s recent presentation at the Center for Strategic and International Studies on Breaking Energy here.