It’s no longer news that the oil industry in going through its worst price slump in decades. And almost everybody tends to agree that the reason for the unprecedented price decline in the unprecedented slump in prices. Simple demand-supply dynamics right? The higher the supply, the lower the price, provided demand fails to catch up with supply. This is the case we are in right now. Now back to my question, who caused the oversupply of crude oil?
I am going to see the oil industry as a simple market, with little regard to internal consumption. Just simple demand and supply.
Source: U.S. Energy Information Administration
The simple chart above shows crude oil production from 2003-2013, an obvious trend is the increase in production from the US, and this is the largest of all production gains. A similar trend occurs for natural gas production. So did the US caused the oversupply? Is Saudi and OPEC just reacting to the subsequent loss in revenue? Or is it just Politics? I don’t have answers to the question but I think it’s more economical that political.
So why is almost everybody telling OPEC to cut production to boost prices, why can’t the US and other non-OPEC producers be required to cut production to boost prices? For once, OPEC or Saudi Arabia (depending on where you sit) is allowing a free market to control the oil sector suddenly they become the bad guys, why was OPEC accused of price fixing in the past? A lot of questions begging for answers.
My answer? I think it’s a bad mix of Politics and Economics but I think in the long run economics is bound to come out on top.