November 18, 2014
That is a serious question. I ask in reaction to the assertion that increased U.S. domestic oil production sparked “a battle among OPEC members and other big producers for market share, leading to a crash in world prices.” This was a prediction from Michael Levi, a fellow at the Council on Foreign Relations. It was cited in a Slate piece by Jordan Weissman which argues that folks like me were wrong to be dismissive about the impact of U.S. production on world oil prices.
I am not saying that Weissman is wrong in his assessment of Saudi Arabia’s motives in increasing production, just that he is not obviously right. If the argument is that lower prices today will permanently displace domestic production, that doesn’t seem to make any sense. If increased demand pushes prices back above $100 a barrel in a year or two, what would keep domestic producers in the U.S. from coming back on line? if the answer is nothing (that seems the case to me), then how is Saudi Arabia gaining anything by increasing production and pushing down prices today.
As an alternative hypothesis, if the United States wanted to punish Russia and Venezuela, two countries with whom the Obama administration has issues, it would be difficult to think of a better mechanism than driving down the price of oil. Could the United States persuade Saudi Arabia to increase production to advance its foreign policy agenda? My guess is yes, but I will leave it to others to decide between these competing hypothesis.
One point that is not arguable is that the drop in world demand has actually had more impact in creating the current oil glut than increases in domestic supply. Current demand is 5.8 million barrels a day less than what was projected in 2007. This is twice the increase in domestic production over this period. That means the recession combined with conservation efforts deserve more credit for the oil glut than increased domestic production.
Comments