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Why are oil prices sinking?

Falling energy costs are good news for consumers. They could also be bad news.

Global oil prices have tumbled this year, declining roughly 25 percent since June. The drop has been so steep that the Organization of the Petroleum Exporting Countries -- which controls about 40 percent of the world's oil supply and nearly two-thirds of all petroleum traded internationally -- may consider a cut in production to winnow surplus oil supplies.

Two major factors, both of which affect U.S. consumers and the broader economy, are pushing oil prices down. First, the recent development of the oil shale fields in North Dakota, Texas and western Canada have changed the equation when it comes to America's dependence on overseas oil production.

The U.S. Energy Information Administration reports that the nation's total crude oil production in September was at its highest monthly production rate since the summer of 1986. The EIA also projects that annual average U.S. crude oil production next year could reach its highest level in 45 years.

Yet while oil and natural gas production is booming in the U.S., demand for oil is down internationally. Weaker growth in China and recessionary conditions in Europe underline the slowing global economy.

"Seven years after the first shock waves of the financial crisis and two years after the sovereign debt crisis in the euro area, economic recovery is still some way off," European Central Bank Executive Board member Yves Mersch said in a speech on Thursday.

"We are not out of the danger zone," he added. "The patient is still fragile and unfortunately relapses cannot be ruled out."

In a recent oil market report, the Paris-based International Energy Agency notes the "recent slowdown in demand growth is nothing short of remarkable." The IEA also says the pace of economic recovery is "now looking somewhat more subdued," and revised downward its global oil demand forecasts for the rest of this year, as well as for 2015.

On the one hand, lower oil prices mean lower prices at the gas pump, and therefore more money for American consumers to spend on other items. But the decline also could lead to harder times in some U.S. communities where oil production is a major economic engine. In parts of the country with oil production facilities, a continuing drop in oil prices could cost local jobs and a reduce tax revenues.

There are also broader macroeconomic concerns. Lower oil prices in the U.S. means higher gas prices elsewhere, which in turn strengthens the U.S. dollar. A stronger dollar can reduce overseas demand for American exports, especially in countries experiencing tepid growth. That can dent U.S. corporate profits, damp domestic economic activity and stunt job growth.

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