Publications: The Petroleum Economics Monthly

The Cause of Energy's Minsky Moment (October 2014)


Energy markets are confronting a “Minsky moment.” A Minsky moment refers to a violent decline in asset prices. Economist Hyman Minsky’s original analysis of such decreases was later popularized by economist Charles Kindleberger. As Kindleberger explains, a vast number of catalysts exist for these moments. Innovation is one of the more usual ones. Investors often pour money aggressively into new concepts and then suffer large losses when the idea results in excess low-priced supply. The current Minsky moment for energy has also been caused by innovation in the form of fracking. US production is now roughly fifty percent higher than projected. The world’s oil-exporting nations (including OPEC members) will sell the United States seven million barrels per day less in 2014 than the amount forecast only six years ago.


US innovation in oil recovery has moved rapidly because crude oil prices have been held artificially high. OPEC is now letting them fall, possibly to very low levels. The efforts to sustain prices above the $100-per-barrel level that promoted technical innovation helped lower costs and increase productivity in shale operations, creating an unexpected competitor for traditional oil suppliers. An unstable market of the type Minsky studied has resulted. Prices must fall further from today’s lower levels to preserve the market share of low-cost producers. The consequences of this decline will be wide-ranging.


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