Publications: Notes at the Margin

The Energy Industry's Irrational Exuberance (January 26, 2015)

 

Last week, we observed the petroleum version of irrational exuberance. It became apparent from a session on oil market issues at the World Economic Forum in Davos, Switzerland. The panelists at this discussion clearly were experiencing irrational exuberance, in particular the Italian oil firm Eni's CEO Claudio Descalzi and the International Energy Agency's chief "economist" Fatih Birol. Both seem under the illusion that oil price levels today are temporary rather than characteristic of a new ceiling that producers will welcome in a year or two.

 

Such individuals have not realized that key oil producers have taken steps similar to those a prudent central banker might take were he or she concerned that the economic situation was getting out of control. In the current circumstances, three of the key "central banks of oil" realized that the irrational exuberance of the market participants threatened to create an excessive oil supply even as the largest consuming nations were working aggressively to "get rid of coal, oil, and gas." Their decision to maintain output was obvious, even if the consequences were painful. It will take years if not decades for the full impact of the resulting price decline to be felt.

 

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