I have in the recent past been tempted to write something about the fall in the price of crude oil. In part I have hesitated because to me the fall is merely a movement in price as evidenced by the chart below which I referenced in Charts of Interest.
However, some of the recent commentary around this fall now makes it more interesting to write about. My ears always prick up when commentators start using phrases such as paradigm shift and global dislocation. In part I am interested because they are such wanker terms but more so because as Carl Sagan said extraordinary claims require extraordinary evidence. Doing a little bit of reading about the current state of the oil market has lead me to ask the question as to whether we are actually witnessing a dick size contest rather than a paradigm shift. I will cede the point that the US becoming the worlds largest oil producer is an intriguing development but it doesnt seem to be completely unexpected as the US became the worlds largest natural gas producer in 2010. My reading of this is that US energy policy has undergone a bit of a shift that has been facilitated by new technologies to enable oil extraction and that these technologies are not exactly new. Nor is the fall in demand that has occurred in recent years. OPEC’s decision not to take their foot of the accelerator with regard to production is the dick contest part of the equation, as to what the thinking is behind OPEC’s decision is anyones guess.
The bleating around the recent fall is also interesting since it is still dwarfed in both relative and absolute terms by the fall in 2008 – most commentary seems to lack context. The fall of 2008 took the price of oil down to just above $30 so the market should be used to seeing price fall quickly to new lows. However, this all part of a narrative that may or may not be correct so we default back to price. If you have been short oil – well done – if you are not then you need to ask why you missed this move. With regard to the fall being part of a fundamental shift in the oil market it is simply too early to tell as there is a pronounced lack of evidence that this is true. Shifts of this nature only become apparent with time