Energy expert and a top choice for U.S. Secretary of Energy, Daniel Yergin, wrote about the dramatic drop in oil prices earlier this month in The Wall Street Journal. In his piece, Yergin makes three helpful points.
His first point is that price swings are not unusual. “The world has experienced sudden supply gushers before. In the early 1930s, a flood of oil from East Texas drove prices down to 10 cents a barrel — and desperate gas station owners offered chickens as premiums to bring in customers. In the late 1950s, the rapidly swelling flow of Mideast oil led to price cuts that triggered the formation of OPEC. And in the first half of the 1980s, a surge in oil from the North Sea, Alaska’s North Slope and Mexico caused prices to plunge to $10 a barrel.”
Second, new supply is now driving price. "[T]he surge in U.S. oil production, bolstered by additional new supply from Canada, is decisive. This surge is on a scale that most oil exporters had not anticipated."
Lastly, price declines will/are causing reductions in energy capex. “The biggest impact of lower oil prices on future output may well be not in North America, where many people are looking for it, but in the rest of the world. Even before the collapse in prices, major oil and natural-gas companies had become preoccupied with the continually rising costs of developing new supply and were heeding the call from investors for “capital discipline. This price decline will turn this preoccupation into an obsession. The result will be a slowdown and reduction in major new investments around the world.”
Yergin summarizes the global shakeout by stating that “the drama is far from over. If prices remain close to their current level, OPEC members will likely come together again to reassess the market, especially as the stronger winter demand fades with the approach of spring. But a pickup in world economic growth, or new disruptions or geopolitical crises in the Middle East or North Africa or elsewhere, could send prices up again.”