Publications: The Petroleum Economics Monthly

The New Economics of Petroleum (August 2016)


Economists and analysts who follow oil markets are unanimous. The high inventories accumulated over the last two years, which now total one billion barrels, must be liquidated or worked off before markets can stabilize. This view, which OPEC and the IEA endorse, also appears in presentations by most investment banks, consultants such as HIS CERA and PIRA, and many excellent academic economists. In all cases, this "standard" perspective indicates an analytic process that sees the market in terms of production and consumption. Invariably, inventories are an afterthought. Stocks accumulate when production exceeds consumption and decline when consumption exceeds production. Inventories beyond amounts needed to facilitate the industry’s operation are seen as an accident that requires correction. This perspective has also dominated the integrated oil industry for decades. This rationale characterizes an economic approach to inventory management and operational decisions that became obsolete in other economic sectors by 1980 if not before. In the current situation, inventories can be an asset rather than a curse.


The August 2016 report focuses on petroleum’s new economics. We suggest the effort of producers to control markets by forcing stock draws will fail. We also show that oil-exporting nations can produce more oil, sell more oil at higher prices, and even achieve higher incomes if they embrace the new market instead of rejecting it.