The price of cheap oil (2)

My recent post covered the gloomy predictions made by the environmentally minded folk when the price of oil was high. One would have thought that a drop in oil prices should bring about a more celebratory mood but has it?

To find out we can trawl the web for articles which deal with particular aspects of the developing scenario:

US oil boom: Can the industry survive falling prices?

“There could be an immense amount of pain,” said energy economist Phil Verleger. “As prices fall, you will see companies slow down dramatically.”

Oil major BP today said it would rack up costs of at least $1 billion (£637 million) over the next year as it embarks on a corporate shake-up which could cull more than 1,000 jobs.

Fears of youth unrest as oil price slump forces Saudi cutbacks

Alternatively, at a risk of going suicidal, we can try a compendium webpage like the one aptly named “Ten Reasons Why a Severe Drop in Oil Prices is a Problem”:

So, after feeding us the end-of-oil-is-nigh and wildlife extinction scenarios for the last 30 years, the “experts” have now switched to predicting a mass extinction of the oil companies and jobs. We have seamlessly transitioned from shortage to over-abundance – both viewed by the “experts” as very troubling and worth writing alarmist articles about. Do these people ever relax or are they constantly chasing new potential threats to obsess over?

I believe the issue is actually quite simple. The price of oil overshot the market equilibrium trend because of two factors. The first one was a perceived shortage resulting from seemingly unabated economic growth – particularly in China and India. The second factor was the collective madness of taxing the carbon industry to subsidise uneconomical and not viable renewable (intermittent) power generation.

So what has changed recently? When the growth slowed (and in many areas reversed) the perceived shortage was exposed as a beat-up and the prices fell. Also we had a phenomenal advancement in the extraction techniques – mainly the widespread adoption of fracking. This affected the supply side and helped drive the oil and gas prices down. In parallel with the above the adoption of intermittent power generation has destabilised the power grids exposing the insanity of fiddling with the core services to satisfy the green fringe.

But not only do I claim to know what and why has happened – I will also make a prediction of where things are likely to go from here! If we leave the market alone the prices will stabilise at an equilibrium level. I do not care if Venezuela collapses while Saudis prosper or the other way around – the market will sort it out. The players whose costs exceed the current market equilibrium price of oil will go out of business. Tough. When the price has risen again they may return to the table or bugger off for good – this is for them to decide.

On the other hand if the regulators feel compelled to fiddle with the supply/demand equation through taxes we will go through a few price spasms as confused market is trying to make sense of the mixed signals. As a result of fiddling more inefficiencies will ensue and stifle the economies, possibly leading to less demand for oil. Also, while the oil price is low more general taxes will be slapped on petrol in the hope that people will not notice. This is a tried and tested ploy – when the price is low you add taxes and when it goes up you introduce regulation to control it. As long as one works for the government one is busy at every stage of the cycle.

Me? I am happy that the prices are low. I love low prices. This leaves more money in my pocket to buy the things I want. But the time window to enjoy this windfall is narrow – the bureaucrats will try to siphon off the emerging surplus as soon as they can…

Oil Barrel - World Map_26732


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