Important analysis in this article of why oil prices are out of step with the economy they are part of driving.
A person often reads that low oil prices–for example, $30 per barrel oil prices–will stimulate the economy, and the economy will soon bounce back. What is wrong with this story? A lot of things, as I see it:
- Oil producers can’t really produce oil for $30 per barrel
A few countries can get oil out of the ground for $30 per barrel. Figure 1 gives an approximation to technical extraction costs for various countries. Even on this basis, there aren’t many countries extracting oil for under $30 per barrel–only Saudi Arabia, Iran, and Iraq. We wouldn’t have much crude oil if only these countries produced oil.
Figure 1. Global breakeven prices (considering only technical extraction costs) versus production. Source: Alliance Bernstein, October 2014
2. Oil producers really need prices that are higher than the technical extraction costs shown in Figure 1, making the situation even worse.
Oil can only be…
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