Early last fall, when oil prices had fallen by about $25 a barrel and
it became clear the decline was more than a temporary blip, the big
question was how far prices would fall. And that would depend on whether and when Saudi Arabia and its OPEC
partners would support the world oil price by cutting their own
production. By this winter we had an answer. The Saudis have made it clear, by
what they have said and what they have not done, that they want the US
and others to cut production before they do any cutting of their own. This is the end of the Organization of the Petroleum Exporting
Countries as we have known it, and it will keep the global oil market
chaotic for some time.
On Tuesday, oil prices fell further after the United Arab Emirates’
oil minister said OPEC would keep output unchanged. Markets will adjust
to this new situation, but not very quickly. And most of the adjustments
will have to come from lower oil production because consumption depends
largely on the level of fuel efficiency of today’s vehicles and planes,
and that’s unlikely to change anytime soon.
Thus, most of the adjustment will have to come from the supply side
of the market, where low prices could force some high cost fields to
shut down earlier than planned and cause many new drilling projects to
be abandoned. Most of the world’s new oil production has come from
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