# Why does the Brexit cause a fall in crude oil prices?

Oil prices have also fallen sharply in the wake of the referendum outcome, with Brent crude down 5.2%. The price of Brent crude fell by \$2.68 to \$48.24 a barrel, its biggest fall since February. At the same time, US crude was down 5.4%, or \$2.69, to \$47.52 a barrel.

But why does this happen?

• Konerak, we use Mathjax here as a way of marking up equations and the like. One awkward side-effect of that otherwise excellent system, is that when we need to display a simple dollar sign, we do need to prefix it with a backslash \ – 410 gone Jun 24 '16 at 9:50
• Correlation does not imply causation. – snoram Jun 24 '16 at 18:56

I'd like to extend Lasse's excellent answer.

Fear and uncertainty are driving markets - but they can drive prices in either direction of course.

Specifically what's happening here is that the oil markets are pricing in at least two effects.

Firstly, the UK is an oil producer, and Sterling's slide means that its oil just got cheaper for other countries. This is a small effect, but relevant, as UK short-run marginal extraction costs are close to current prices, so some UK fields are marginal producers and thus price-setters.

Much more importantly, the markets are now pricing in the possibility of a further slump in oil demand, as a result of poor general economic performance. That would be driven not only by a soon-to-be-declining UK economy, but also driven by a (much larger) destabilised European economy; and also driven by the possibility that this vote will mark the turning point, where globally we move away from a consensus on the value of tariff-free international trade, and back towards protectionism and isolationism, which would leave the global economy worse off, as well as leaving most participants individually worse off too.

Fear and uncertainty.

Stock markets have plummeted. Currency has plummeted. Noone really knows what is going to happen and hence economic future development is very unsure.

Thats whats driving the price at the moment.

Brexit causes uncertainty about economic growth, and thus* for (future) oil-demand.

If oil demand will fall, prices will fall.

*currently, economic growth directly translates to increased energy (and thus oil) demand. This relation is becoming increasingly less strong.