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$60 Oil Will Not Last Long

$60 Oil Will Not Last Long

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U.S. oil prices are treading water above $US 60/B (WTI) again, the first time since 2015.

Crude oil has a northerly wind in its sails, though everybody on board this fickle ship is cautious about its compass bearing. Since 2013 we’ve seen the price of a barrel peak to $110, capsize to $26, and roll back to $60.

The gyrations make sense.

Here is what we’ve learned over the past decade:

Above $80 is too high. Cash flow is ample. Investors gladly fund more drilling rigs. Pump jacks work hard. Too much productive capacity is added. But costs inflate quickly too—competitiveness diminishes within the oil industry, and also encourages alternative energy systems. Consumers become more miserly and demand growth decelerates.

Under $40 is too low. Cash flows dry up and investors jump ship. Rigs head back to their yards with drooping masts. Costs deflate, rapidly decimating employees and equipment in the service industry. Production begins to decline in marginal regions. State-owned enterprises are unable to pay their ‘social dividends’. On the consumption side, conservation and efficiency lose meaning; consumers revert to guzzling oil like free refills of coffee.

So, simplistically a mid-range price of $US 60/B should represent what oil pundits call “market balance.” It’s the elusive price point where daily consumption is equal to production; inventory levels are neither too low nor too high; and economists’ cost curves intersect with demand.

Yet, if there is one thing 160 years of the oil age teaches us, there is no such thing as a mid-range balancing point in oil markets. Everyone either rushes to one side of the ship or the other, almost always at the wrong time.

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