Publications: Notes at the Margin

An Early Christmas Present for Shale Producers: The New Economics of Oil Will Prevail (December 5, 2016)


Oil-exporting countries have just given US shale producers an early Christmas present. Make no mistake about it, our domestic production has just gotten the sort of boost dreams are made of. Donald Trump may make good on his promise to create two million manufacturing jobs. They will, though, be jobs in "manuFracturing." Maybe the Bureau of Labor Statistics will reclassify working on land rigs as manufacturing jobs.


Bloomberg's Liam Denning published a neat exposition on what might happen to OECD inventories over the next six months if OPEC holds to its agreement. Per his calculations, these stocks could fall back to "normal levels" within a year if this happens. Denning’s analysis, based on the "old oil economics," ignores two things, however. First, it is not OECD stocks that OPEC must confront but opportunistic stocks. It will take longer to liquidate those holdings. Second, he makes an assumption regarding behavior—and this is an incredibly big assumption. Specifically, he and OPEC believe those holding stocks will graciously do as expected and sell. In other words, inventory holders are lemmings. Those holding stocks could confound expectations and choose to keep their inventories. They understand modern finance and excess returns to storage. By and large, they are smart business people with no loyalty to the old way of doing things. Remember, this is the new economics of petroleum.


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