Publications: Notes at the Margin

Toward Extreme Price Volatility (October 5, 2015)

 

The oil industry is under attack. Producers benefiting from very low production costs have opted to follow first economic principals and boost output to levels that equate marginal costs with price. The supply they have added to the market has driven prices down more than fifty percent. Mother Nature has dealt former princes of the industry such as Shell a bad hand. There may be oil reserves in the Arctic. However, they are not sufficient to be produced profitably if those holding low-cost reserves refuse to cut production. One big player in the auto industry, historically the oil industry’s mortal enemy, has been caught violating environmental rules. Oil refiners will suffer the biggest loss from this, not the owners of faulty vehicles, the auto firms, or the auto firms’ shareholders. Lastly, investors are deserting oil. The upshot of these factors may be greater crude oil price volatility, the subject of this week's report.

 

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