Okay, let's try to run over the basics.
For various reasons, oil prices can be quite sensitive to small fluctuations in the supply-demand balance (*). Seemingly small differences in that balance (e.g. demand, supply, or both being above or below some baseline) can cause large differences in prices. For good reasons, its pricing sometimes behaves very differently than what we expect from many other kinds of products. (I'm happy to go into the main whys of that if you're curious.) Further, over any sufficiently long period of time (e.g. 6 months, a year, 2 years) oil pricing has to resolve or average out, so to speak, to whatever the supply-demand realities are for that period of time. (Again, I'm happy to go into the whys of that if you're curious - but it's a basic physical reality of this market.) However, oil pricing at any given moment is largely speculative. It reflects the markets' collective expectations for future (fairly short-term) supply and demand, weighted for various risks that the markets appreciate. That means oil pricing is, looked at at given moments rather than over a long enough period of time, often wrong. That is to say, markets guess wrong and the price doesn't accurately reflect the magic number that's needed to keep supply and demand in balance (i.e. suppress consumption and encourage production enough, or vice versa, such that consumption and production are rough equal). When this happens, and the mis-pricing becomes clear, that pricing has to correct. Further, because of what I suggested before - that prices over longer periods of time necessarily have to be 'correct', sometimes pricing has to overcorrect to undo, so to speak, the supply-demand effects of it having been misplaced in the other direction for a while. That's the background understanding needed to get what's happening now.
Well... some time ago oil prices were, we realize now, higher than they should have been. Markets had priced in geopolitical concerns over supply disruptions that, as it turned out, didn't materialize. Global economies - most everything that matters, aside for the U.S. - have continued to stagnate, perhaps more so than was expected a year or two ago, meaning global demand hasn't increased as fast as might have been expected. Higher priced oil has led to the development of new supply, e.g. from shale deposits, faster and on a greater scale than had been anticipated. Those things, and others, have meant that oil was priced higher a year or 6 months ago than it needed to be - than the magic number, as I called it before, would have been. When this became apparent, when we realized we were (or would be) producing more oil than was being consumed at current prices, oil prices started to correct. And since the mis-pricing had persisted for a while, they arguably went on to overcorrect.
Under different circumstances or at a different time, OPEC likely would have stepped in and stabilized falling prices by cutting production (or, at least, announcing that they were going to cut production). To some extent that was expected this time around, but the likes of Saudi Arabia and the UAE were apparently able to convince the more jumpy members of OPEC to play the long game. That is to say, they decided not to cut production and to let the tumbling oil prices punish some of their newer competition - production that isn't as viable at lower oil prices. OPEC is trying to protect its market share and its control (whatever it has left) of pricing, and it's willing to endure lower oil revenue over the near term in order to do that. It isn't a surprise that Saudi Arabia, e.g., would take that tack, it's in good enough economic shape to play the long game. But it is a bit of a surprise that some of the other members of OPEC, who aren't in as good a shape, would go along. Then again, maybe they realized that the likes of Saudi Arabia and the UAE might just unofficially make up whatever supply they all collectively agreed to cut in order to keep prices falling anyway. So they had no choice but to go along? What Larry suggests - about punishing / exerting control over Russia and Iran - is an additional benefit that likely factored into the decision, but I don't think it was the primary driver of it.
The point of OPEC's decision, its inaction in the face of falling oil prices, is to destroy the last half million barrels per day of production that the world might have been producing a year from now. A key thing to understand about the global oil market is this: Thinking of it in nice round numbers, as a 100 million barrel per day pie, it doesn't so much matter what it costs to produce the first, say, 98 million barrels. Much of that can still be produced very cheaply. What matters is what it costs (or would cost) to produce that last million or two barrels. Oil prices are determined at the margins of supply and demand. And we're seeing quite a bit of evidence that what OPEC is doing, or not doing, is working. There's little question that some oil that would have been being produced a year from now had oil prices remained high, now won't be. I still think that total U.S. production, e.g., will increase over the next year. But it won't increase as much as it would have, and that's the point.
Anyway, there's some oversimplification in there and I've left some aspects of the situation out. But I think that's a fair gist of what's going on and has gone on. Hopefully I didn't run on too long.
I've got some other thoughts I'll try to share after I get back from playing golf. If you have any questions, I'll try to answer them then.
It also sets back the green energy / electric car trend by making the alternative so much more attractive.
