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Why are oil prices falling? 5 reasons you might not expect

Gas prices below $3 dollars are displayed at a gas station, Wednesday, Oct. 15, 2014, in Jersey City, N.J. Julio Cortez/AP

Oil prices have collapsed over the last several months, and some analysts say they could go even lower. What's behind the plunge in oil prices?

A variety of factors have coalesced into a perfect storm driving oil prices lower and lower: US prices have fallen 25 percent to around $80 a barrel in the past five months – a large drop, given that prices had been floating around $115 dollars a barrel from 2011 onward.

In late October, Goldman Sachs revised its 2015 forecast to predict that oil prices would continue a downward slide. Goldman predicts soft demand and a glut of supply will drive West Texas Intermediate – the North American benchmark – to $70 a barrel in the second quarter of 2015. Global benchmark Brent could dip to $80 that same quarter, according to the report, when oversupply is at its peak.

But the global oil market is unpredictable, and dependent on a variety of factors.

“[O]il is an imperfect market in every way,” says Deborah Gordon, director of the energy and climate program at the Carnegie Endowment for International Peace, a Washington-based think tank. The market is racked with government intervention, cartel manipulation, and high barriers to entry, Ms. Gordon says. “It would be hard to imagine a more imperfect market.”

For now, that imperfect market is a boon to US motorists, who are enjoying the lowest gas prices in years. And those savings could translate into increased consumer spending in other sectors. Low gas prices have a downside, though, encouraging increased gasoline consumption and the purchase of larger, more inefficient vehicles.

Falling crude prices also threaten oil producers in Texas and North Dakota, where the cost of extracting hard-to-reach oil from shale is high. Oil producers in those regions are already cutting rig counts – worried that if crude prices dip too low, wells won’t turn a profit.

Abroad, Venezuela, Russia and other petro states are wringing their hands as well, watching nervously as prices plunge. Those oil-dependent governments rely on high-priced crude to round out their budgets, and falling oil revenues mean they’ll have to curb their government spending.

Relief for those countries may not come anytime soon. Here are the five main reasons oil prices have been falling:

1. US oil production is booming

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    A worker hangs from an oil derrick outside of Williston, N.D.
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Exploding US oil production has transformed one of the world’s leading oil consumers into one of its leading producers as well – in fact, North Dakota alone produces a million barrels of oil per day. US production now rivals oil giants Saudi Arabia and Russia, largely thanks to innovative drilling that has unlocked oil and natural gas deposits trapped in shale rock.

US production has cushioned oil markets from geopolitical strife in the Middle East and Ukraine, and are pushing down gas prices. Analysts expect gasoline could slide below $3.00 a gallon before the end of the year.

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