The Paradox of Oil: The Cheaper it Is, the More it Costs | The Simplicity Collective

by Samuel Alexander

It would be fair to say that the timing of the sudden drop in the price of oil since June 2014 took energy and financial analysts by surprise. After averaging around US$110 per barrel since 2011 (IEA, 2013: 6), suggesting a ‘new normal’, the last six months have seen the price of oil fall to around US$50 per barrel (as of February 2015)… In my article ‘The New Economics of Oil’ (Alexander, 2014) – published a few months prior to the fall in price – I explained why expensive oil has a stagnating effect on oil-dependent economies, which I argued could lead to a drop in oil demand and thus a sharp fall in price. I also explained why expensive oil can incentivise greater investment in production while dis-incentivising consumption, a dynamic that can increase oil production faster than demand and thereby generate short-term oil gluts that can also lead to price volatility, only via a different route…. I also hope to challenge the naive conclusion – drawn all-too-hastily in the mainstream media – that the drop in price somehow debunks the analytical framework of the ‘peak oil’ school.

There’s more to the political economy of oil however. While I haven’t yet read the entire 18 page article above, I couldn’t find a single reference to the word “Saudi” in it. The snip below from an article on Middle East geopolitics opens another avenue for exploration.

There was a decision by Saudi Arabia to reduce the price of oil for two reasons: to hurt Iran and to put pressure on Russia to change its stance and drop its support for President [Bashar al-]Assad. The Saudi determination to get rid of Assad remains extremely strong in Riyadh. They only reduced output by 100,000 barrels a day in the first month, and then it started an avalanche: The market had been artificially inflated by the oil companies lending crude oil to financial investors who want a hedge against inflation and currency fluctuations.

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2 Responses to The Paradox of Oil: The Cheaper it Is, the More it Costs | The Simplicity Collective

  1. SA says:

    The article explicitly discusses the geopolitics of oil, including the role Saudi Arabia plays shaping oil prices and why they might want to do this to undermine Iran and Russia.

    • Bob Thomson says:

      I apologize. I searched the article for the word “Saudi” and didn’t find it. It seems the search function in my tablet’s PDF reader is defective. There is indeed a good reference to the Saudi effort to manipulate price at page 9 of the full text.

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