EMF OP 14.1: Will Oil Prices Collapse?

Abstract:

A decline in the price of oil has become a surprising, and dramatic, feature of the world oil market. The first signal was a falling off in the prices of oil company stocks beginning last December; these declines have now reached 50 percent for some companies. The price of nearby heating oil futures, which reached a peak of $45 per barrel last fall, have fallen to under $40 per barrel. Posted prices for some oil exports have declined and there has been more substantial price discounting. Oil importing companies have been refusing to renew contracts of prices they deem to be too high. If the market forces which have produced this downward pressure are supplemented by a substantial increase in oil production from Iraq and Iran in the next 12 to 24 months, Saudi Arabia and other oil exporters may face an unimaginable problem: to maintain the price of oil at anything close to the present level. Although this is not a firm prediction (if for no other reason than that the course of the war between Iraq and Iran is so uncertain), there is a good change that real price of oil will be sharply reduced in the next two years. If this happens, industry and governments will face a set of energy issues strikingly different from those that have dominated their concerns for nearly a decade.

Reprinted in Challenge: The Magazine of Economic Affairs, Vol 14, No 5