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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 points I’ll make are:

  • Everything that happened so far (May 2016) is basic economics working and there’s basically nothing OPEC could do about it.
  • Prices were very low because of excess shale drilling.
  • In the most likely scenario, prices in the next decade will reflect the “all-in” cost per barrel of shale oil, estimated at $60-$70 $45-$60?
  • In the next likely scenario, prices in the next decade will be even lower, reflecting the “all-in” cost per barrel of the more expensive of traditional oil. I’d guess this is around $30. This will happen if electric vehicles become cost effective at current prices.
  • However, if governments decide the environmental impact of shale drilling is too negative, oil prices will climb back to 2010 levels.

The next posts discuss:
Why $65-$70 ($50-$60) a barrel should be the new normal
Why is price today lower than shale’s “all-in” cost?
Why isn’t OPEC raising prices?
What I think will happen next
2017 update

 


  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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