Oil prices have been dropping sharply over the past three months and the story has deep repercussions for the future of the Organization of the Petroleum Exporting Countries (OPEC), USA and Russia. OPEC is engaged in a price war with the US. The US is producing more oil than at any point since 1986. The cartel will let prices fall in the hopes that many of the new drilling projects in the US will prove unprofitable and shut down. But how low can they let the prices go?

Many of the OPEC countries require high oil prices to balance their budgets. Libya is in the throes of a civil war, Iraq is also a mess. Iran, for one, is facing a real pinch with added oil sanctions by US and Europe. Those conflicts took more than 3 million barrels per day off the market. To add to this, oil demand in Asia and Europe is weakening, especially in China, Japan and Germany. This signals a new world order where oil is concerned- the power of OPEC is waning.

The combination of weaker demand and rising supply caused oil prices to start dropping from their June peak of $115 per barrel down to around $80 per barrel by mid-November. The drop is due to market forces. However, there is a concerted effort not to let the price rise by cutting production. Saudi Arabia is the biggest supporter of this, and for good reason. In the 1980s, process fell and they tried to cut back on production to prop them up. The result was that the price kept dropping anyway and Saudi Arabia only lost market share. The Saudis can live with lower prices, at round $80 per barrel in the short run. They have enough foreign-exchange reserves to finance deficits. But the rest, especially Iran and Venezuela, cant do the same. These countries need high prices to break even on their budgets and pay for government spending they’ve racked up.

The problem is that no one quite knows how low prices need to go to curb the US shale oil boom. Rather than pushing the US out of the market, the price war may damage the economies of the OPEC members.