"Crisis in the Oil Market: Remembrances of the Past, Policy Responses for the Future" EPRINC WEBINAR 5/12/2020 Michael Lynch comments
FIGHTING THE LAST WAR OR LEARNING FROM HISTORY? The Maginot Line was designed to work against the WWI German battle plan. King Solomon Supposedly wrote, “There is nothing new under the sun” about 3000 years ago.
THIS IS NOT THE FIRST OIL PRICE CRASH (1994)
A SINGLE SPARROW… DOES NOT A SPRING MAKE u TENDENCY TO MISTAKE SHORT-TERM TRANSIENTS FOR LONG-TERM TRENDS u u 1973/4 u 1979 u 1998 u 2004/14
SPOT THE EXPONENTIAL GROWTH! $140 $120 $100 2017$/BBL $80 SOLOW $60 $40 $20 $0 1861 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 In 1973, during the oil crisis, MIT economist Robert Solow argued that a 1931 paper proved that mineral prices had to rise exponentially. This contradicted reality, as the graph above shows, and his colleague, Morris Adelman (my mentor) correctly 5 noted that it was the reduction in supply from the Gulf countries which sent prices up.
1998 OIL PRICE SHOCK BOOMING PRODUCTION AND/OR u INVESTMENT u NORTH SEA u OIL SANDS u ORINOCO u G-T-L ALL PROFITABLE AT $20! u In nearly every oil price boom and bust, there are those Who expect the sudden price move to persist. Expectations 6 That the price would remain at $12 for years were not uncommon.
OPEC+ DESPARATE TIMES REQUIRE DESPARATE MEASURES u u PRICE WAR PRECEDED PANDEMIC u WHAT WAS THE CAUSE? u PROTECTING MARKET SHARE FROM COMPETITORS (I.E. SHALE) u TRYING TO FORCE OTHERS (SAUDIS) TO CARRY A BIGGER BURDEN u (AND AVOIDING THAT ON THE PART OF THE SAUDIS) WHAT WILL COMPLIANCE LOOK LIKE WHEN INVENTORIES TOP OUT AND BEGIN u TO DROP?
Non-compliance in 1998 1400 1200 1000 800 TB/D 600 400 200 0 Jan-94 JUL Jan-95 JUL Jan-96 JUL Jan-97 JUL Jan-98 JUL Jan-99 JUL Jan-00 SAUDI IRAN IRAQ UAE QATAR VENEZUELA NIGERIA INDONESIA ALGERIA Source: Energy Intelligence Group Besides the perceived future threat to market share, Venezuela had announced it would no longer obey quotas and was ramping up 8 production. The combination helped to trigger a price war in 1998.
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