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opinion

Steve Yetiv is the Louis I. Jaffe professor of international relations at Virginia's Old Dominion University and author of Myths of the Oil Boom.

Global attention is focused on oil prices, which have plunged from more than $105 (U.S.) a barrel last August to about $42 now. The stakes are big. Indeed, no commodity comes close to oil in affecting global economics, security and politics, which raises an important question: Where are prices headed?

For many consumers, especially Americans, the good news is likely to keep coming. Earlier in the summer, oil prices bounced back to about $60 a barrel, but several factors reversed those gains and are likely to suppress prices in the near future, or at least prevent any big jump.

China's economic miracle has sputtered, as reflected partly in the its stock market crash. Beijing has propped it up, but market woes have contributed to concerns that the country's economy is slowing. Some analysts have been calling China a paper tiger – an exaggeration, but since it's the world's biggest oil importer, concerns about its economy have hit oil prices hard.

And then there is the House of Saud. Last November, the Saudis decided, contrary to their usual behaviour, not to cut production to counter dropping prices. That Saudi inaction helped trigger the oil price crash, and was probably driven by an interest in hurting the North American oil boom, capturing market share, instilling discipline in OPEC and undermining arch-enemy Iran. In any case, the Saudis have not changed their policy, despite the enormous budgetary pressures they face with oil at $42.

Not to be outdone, U.S. shale oil producers haven't cut back on production as much as expected. As if locked in a prize fight, they refuse to let the Saudis knock them out, and no one appears to be blinking.

Adding to this is the fact stronger economic data in the past two months make the U.S. Federal Reserve likely to raise interest rates this year, rather than next. That has spooked American markets and bolstered the already meteoric U.S. dollar. Since oil is traded in U.S. dollars, this translates into lower oil prices (for Americans, if not necessarily Canadians). Beijing's currency devaluation is just one more factor that will bolster the greenback.

Oil prices will rebound when these factors start to reverse, but that will take time. China's doldrums won't go away with an overnight fix, no matter how much Beijing waves its wand. The strong U.S. dollar is buttressed by views that America is a safer bet for foreign money and investments than most other places. That also won't change quickly. Saudi policy may shift in the coming months, but only if Riyadh believes that its fellow OPEC members will now have the discipline to stick to agreed production cuts aimed at driving oil prices higher.

The most likely trigger for an oil price bounce will be data showing that American frackers have finally cut back production. But that bounce, in the absence of other developments, is not likely to push prices beyond the $50-a-barrel range, even if it is now nearing a bottom.

In Washington, Congress could reject the Iran deal and override a presidential veto. That would maintain U.S., though not necessarily global, sanctions on Iranian oil exports and push oil prices higher. But such congressional action will not be an easy task.

Of course, we may face a major geopolitical event or some other unforeseen development that also affects prices. Iraq and Libya, for example, have significant oil production at potential risk on any given day. All in all, though, it appears that low prices will persist through at least the coming months. So consumers not tied to the oil industry can cheer, even as producers feel the pain.

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