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Summary in slides form

I’ve been using oil prices in my classes for the last two years to illustrate how basic economics and widely available data explain potentially puzzling surprises. This and the three related post summarize my take. Though I am not aware of any write-up making the same points as here, it is consistent with a recent op-ed by Citibank’s Ed Morse and this NY Times summary.

This chart, from eia.gov shows the change in oil prices over the last 30 years.1
OilPricesSimple

The bottom line:

  • Everything that happened so far (May 2016) is basic economics working and there’s basically nothing OPEC could do about it.
  • In the most likely scenario, prices in the next decade will eventually reflect the “all-in” cost per barrel of shale oil, presumably $60-$70 $50-$60
  • Prices were very low in 2014-2015 because of excess shale drilling.
  • If and when electric vehicles become cost effective at $50/barrel, everything changes (and requires a whole new post).
  • If governments decide the environmental impact of shale drilling is too negative and electric vehicle don’t work out, oil prices will climb back to 2010 levels. This is very unlikely.

For more detail
Why $50-$60 a barrel should be the eventual new normal
How can price be lower than $45?
Why isn’t OPEC raising prices?
What I think will happen next

 


  1. The EIA plots do are not adjusted for inflation. This doesn’t change the big picture. See here and here

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