Tuesday, January 13, 2015

The Basics on the Oil Price Collapse

NYT correspondent  Clifford Krauss provide a solid explanation for the current oil price collapse:
 Why is the price of oil dropping so fast? Why now?

This a complicated question, but it boils down to the simple economics of supply and demand.

United States domestic production has nearly doubled over the last six years, pushing out oil imports that need to find another home. Saudi, Nigerian and Algerian oil that once found a home in the United States is suddenly competing for Asian markets, and the producers are forced to drop prices.

On the demand side, the economies of Europe and developing countries are weakening and vehicles are becoming more energy-efficient. So demand for fuel is lagging a bit....

Oil production is still increasing in the United States and some other countries. Many Wall Street banks are predicting that the oil price could fall as low as $40 a barrel in the coming months.

But production is likely to begin declining in the second half of the year, and then crude prices will also begin to recover. The history of oil is a history of booms and busts followed by more of the same.


  1. If this is all true, why are commodities other than oil also dropping? I place greater weight on the "value" of the dollar in relation to other fiat currencies. It's the supply and demand for dollars.

    1. How much of the pricing of other commodities is interrelated to oil?

      Answer: Many, MANY of them...as ultimately the cost of transportation affects much.

      " I place greater weight on the "value" of the dollar in relation to other fiat currencies."

      Value is subjective, but even if one was going to debate your statement...they might start off by saying, "Yes, you are definitely pick the best turd in the pile."

      It might be better to avoid currency investing in general, but it's a marginally free world, do what you want.

    2. Remember, if a news narrative is too juicy like "those bad arabs are making the price of oil go down", then any facts to the contrary such as the unfolding bear market for most commodities will just have to be placed to the side. Its all about the clicks and page views, not any real analysis.