AFP

ECONOMISTS bracing themselves for Chicago's icy snows as they arrived for this weekend's meeting of the American Economic Association got something of a shock. The sun has been shining over the Windy City and temperatures are relatively mild. On the east coast the weather is even better; New York has not got this far into the year without snow since 1877. Though Colorado lies buried under a blizzard, the territory to the north and east has so far escaped winter's embrace.

The odd weather has created some unusual conditions in the oil market. For the past few years, the main worries for big producers have been security problems in the Middle East and Africa, and economic populism in Latin America. Despite these continuing pressures, oil prices plunged last week, dropping to $54.90 a barrel in intraday trading on Friday January 5th, the lowest price for over 18 months, though after the weekend prices rebounded a little on world markets.

The best explanation seems to be the warm weather in both Europe and America's north-east, the world's largest market for home heating oil. Inventories are piling up, pushing down crude prices. Even if winter makes a belated appearance, the higher stocks will cushion upward price pressure, as well as the sort of supply shocks of recent years that have sent prices soaring. American demand may be depressed for another reason: several years of high oil prices are finally sinking into the country's consciousness. Sales of fuel-thirsty SUVs are suffering, while hybrids and smaller cars have grown more popular. There is evidence that consumers and governments are pushing for conservation of heating oil too, with more efficient furnaces and higher standards required for home insulation.

But demand is not the only side of the equation. Security problems for the big producers could send prices rising sharply again. And even if there are no big disruptions in Africa or the Middle East, OPEC will surely act if prices drop too low. The oil cartel's public pronouncements have grown increasingly hawkish since prices peaked at over $78 in July and it has cut quotas since then. But many member governments have become dangerously dependent on the windfall revenues from oil.

Hugo Chávez, who has been particularly pugnacious, has been using Venezuela's state-run oil company to fund social spending at the expense of reinvestment in oil production. Many believe that other countries, such as Iran, have similarly shortchanged investment to bolster popular support. If prices fall precipitously, Mr Chávez and others with similar problems could find themselves in deep fiscal—and political—trouble. Though other governments may not face problems so dire, none are eager to see revenues fall.

OPEC's power over prices will be checked by two factors. The first is the negative impact of prices on demand, which limits the ability of the cartel to maintain price discipline over the long term. This happened in the mid-1980s, when a sustained period of high prices encouraged oil companies to invest in new non-OPEC capacity, while governments and individuals adopted measures to use fuel more efficiently, causing prices to collapse. Economists have marvelled that the recent price increases had encouraged so few conservation measures, but there is evidence that this is starting to change, particularly in America.

The other challenge to OPEC's price discipline is cheating. Over the past few years members have been racing flat out to keep up with the growth in global demand. But if OPEC cuts production to well below the peak capacity of its members, governments in the throes of a fiscal shock will be tempted to produce more than their quotas to make up some of the lost revenue. Historically, this has been a strong check on OPEC's ability to keep prices high.

The other unknown variable is the performance of the global economy in the coming year. Lower oil prices would improve matters—but if the economy strengthens, demand for oil will probably pick up. After this weekend, energy economists might have trouble judging which way the wind is blowing in the oil markets.