Helping America Navigate a New Energy Reality

What Past Oil Crashes Say About Today’s Slump

By on 13 Jan 2016 in notable posts, viewpoints

(Fortune) The oil industry is going through its third crash in prices since the formation of the OPEC cartel. Many are wondering when the market will recover and what oil prices will be when it finally does.

The first price crash came in the mid-1980’s, a decade after OPEC’s formation. The second crash came at the onset of the Great Recession in 2008 when oil prices fell from over $100 a barrel to below $40. The third one is the present decline, which began around September 2014. What do the first two experiences tell us about how the present price collapse will play out?

 Oil prices affect oil consumption slowly, and they affect oil production in non-OPEC countries very slowly. The OPEC cartel tries to maintain price targets by varying its own production in respo960nse to imbalances in the world oil market. This requires cooperation among its members and is far easier to do when the market pressure is pushing prices up than when it is pushing prices down. Maintaining prices is especially hard if the downward pressures are expected to be longer lasting rather than transitory.

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