What’s up with oil prices?
Or, what’s down? When prices hit $145 / barrel in 2008 there was lots of talk of “peak oil.” After all, prices had risen from under $20 / barrel less than 10 years before and there was no supply-shock driving prices. The impetus was growing demand in China, which had joined the World Trade Organization in 2001. In 2004 prices broke out of their two-decade range. No one knew how high they would go. Global demand was growing faster than global supply. All the cheap stuff had been found, it was thought.
Then came the fracking revolution and the reemergence of the US as a major producer. US oil production surged by over 60%. When the Saudis decided this summer to keep pumping at their maximum rate, markets suddenly realized the world was awash in oil. Prices have fallen almost $40 the past three months.
Inflation-Adjusted Crude Oil Prices:
Will prices stay down? With winter coming on, we all want to know. It depends on how producers respond. Part of the reason prices have fallen is our economy is less energy-intensive. Over the past 10 years we’ve purchased more efficient cars and furnaces. With lower prices US production has fallen 5% as some North Dakota fields go offline. That’s not much of a shock. A real test will come if these prices lead to an economic crisis and debt default in Russia. They’re one of the world’s largest producers. Now that would be a shock!
When prices rose, we learned that the cure for higher prices was higher prices. Now that prices are down, the cure for falling prices will be … falling prices.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!