Tuesday, January 6, 2015

Economy: Watching The Falling Oil Prices - Why The Oil Crash Was Unavoidable And Will Start A New Era

 (Drivebycuriosity) - I have so much fun these days. Watching the falling oil price is a great pleasure. For years I have been writing that "oil is the mother of all bubbles" (2012) (2013) and "the greatest bubble of them all" (2014). For years I have been describing that oil has been way too expensive; that oil prices didn`t represent the supply/demand situation on the markets anymore because of continuous speculation on possible supply disruptions from Iran and other nations in this region.

For years I have been explaing that the extreme high oil price (around 5-times of the prices before 2002) induced an expansion of oil production, for instance in the US and Iraq, and simultaneously curbed the demand for oil (more fuel efficiency).  For I years I was describing how the high oil price will lead to an overproduction and an oil glut on the markets. For years I was reckoning that the bubble has to burst some day - as all bubbles do. "At a certain point the bubble gets to big and it pops" (driveby)

Now it is happening, the oil glut is destroying the bubble - priceless.

I believe that price of oil has to go down deeper, at least for a while. Today oil costs still more than twice we had to pay from the mid 1980s until 2002. There are still too many hedge funds and other speculators invested in oil, meaning there is still some air in the bubble (hedge-funds). Markets tend to overshoot and to undershoot, meaning that prices are sometimes way above the fundamentals and sometimes deep below, noticed the economist Rüdiger Dornbusch (imf). Maybe after some years of overpriced oil we could have a period of underpriced oil?

                                                             Post OPEC

Anyway, I think that we are now witnessing the start of a new era of cheap oil. Bloomberg reports that Russia, Iraq, Iran and other nations are expanding their oil production to record levels (bloomberg).

The costs for alternative oil exploration (fracking and horizontal drilling) is falling - thanks to the technological progress - and producers are becoming more efficient (economics21). Today the market gets flooded by shale oil from the US and countries like China, Russia and Australia have huge shale oil reserves too which could be exploided (bismarck). A growing oil supply and restrained demand (thanks to rising fuel efficiendy) will keap oil prices under pressure in the coming years.

I believe OPEC´s market share will shrink in the coming years making the organization mediocre again as it was in prospering 1990s and before 1972. Maybe OPEC will fall apart (post-opec).
The high oil prices had strained the global economy in the recent years. Expensive energy was some of the causes for the disappointing slow econmic recovery. Drastically dropping energy prices are working like a gigantic tax cut. Fall transportation costs and dropping energy costs for producing things (including food) will translate into lower prices for many goods and will lift the live standard for many.

Welcome to cheaper oil.

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