Oil producing countries keep up output despite prices falling to six-year low

The big oil producing countries keep on pumping, even though prices are at a six-year low: Don't they know they're only making things worse? Chances are they do - each has its own reasons to continue - but this won't go on forever. Someone will blink in the next year or so, most probably US shale producers.

In the US, the crude oil price has dipped below US$40 a barrel. Brent, the European blend, is trading below US$45. Still, output from the Organisation of Petroleum Exporting Countries increased to 31.5 million barrels a day in July.

Production in Saudi Arabia, Iraq and Venezuela is at or near the highest level in a year. Russia, now the world's biggest crude producer, increased output by 1.3 per cent year-on-year in the January to July period, and is pumping 10.6 million barrels a day. US production has dipped slightly in recent weeks, to 9.3 million barrels a day from the June peak of 9.6 billion, but it's still substantially higher than a year ago.

The simplest explanation for this phenomenon is that the producers need the cash; the lower the price, the more they need to sell to maintain revenue. Among the trio of top oil producers - Russia, Saudi Arabia and the US - this need-for-cash argument works best for Russia.

Last year, as crude prices began to fall, it quickly floated its currency. Since then, the rouble has devalued in lockstep with oil, so that every extra barrel sold produces the same revenue in roubles, which is the currency of the government's budget.

As a result, Russia has no reason to cut production, even if it probably will suffer a future decline in output, because its major oil companies have sharply reduced investment.