The staggering drop in oil late last year was universally unexpected. While we have seen drops before, this one is both sudden and severe. My take on it was that North American frackers were so successful in making us energy independent that the world slowly became over-supplied with oil.
Then, when questions about the global economy suggested oil demand would fall, the initial drop in the price of oil became magnified. Saudi Arabia, as the "swing" producer could easily have withheld oil from the market and maintained the price. However, they are also the low-cost producer and can still make a profit at today's prices. The problem is that North America frackers cannot! If those frackers go out of business, that would be fine with Saudi Arabia and OPEC. We would lose our hard-won energy independence.
Now, take a look at this graph:
Then, when questions about the global economy suggested oil demand would fall, the initial drop in the price of oil became magnified. Saudi Arabia, as the "swing" producer could easily have withheld oil from the market and maintained the price. However, they are also the low-cost producer and can still make a profit at today's prices. The problem is that North America frackers cannot! If those frackers go out of business, that would be fine with Saudi Arabia and OPEC. We would lose our hard-won energy independence.
Now, take a look at this graph:
Technical analysts, who attach great significance to charts, look at this chart and tell us that the drop in the price of gas, as a proxy for oil, is not sustainable. A drop in price was justifiable in terms of supply & demand, but this was too sudden and too severe to be sustainable. The chart tells us there is more than economics involved. The ugly nose of geopolitics is under-the-tent.
Economists tell us the drop is unsustainable, but foreign politicians may yet make it sustainable, albeit for the wrong reasons.
