Courtesy of Mish.
What’s Behind the Plunge in Oil?
In the wake of a widely unexpected, huge oil price decline, I have received many questions and comments.
Some speculate US pressure on Saudi Arabia to punish Russia. Others think “big oil” is out to punish the frackers.
I responded to a friend today that the explanation is simple. No conspiracy theories needed. This was my proposal.
Explaining the Plunge in Oil
- Slowing global economy, especially China and Europe
- US production expansion
- OPEC pumping above quotas – they all cheat
- Iran embargo failing
- Increased fuel economy
- Attitudes of millennials towards cars and driving
I give heaviest weight to number one, but they all cascade.
To maintain revenue with US producing more of its own oil, OPEC members cheated more to maintain revenue. Increased fuel economy and attitudes of millennials are longer-term factors, but they become more important as demand drops due to the slumping global economy.
Discarding Conspiracy Theories
I am a big fan of Occam’s Razor, a principle that suggests the simplest workable explanation is likely to be the best one. (For an tie-in to bank lending, please see Occam’s Razor and Bank Lending.)
In this case, a slowing global economy thesis is a far simpler explanation that the notion that the US pressured Saudi Arabia and OPEC, and both of them agreed to cooperate, simply to punish Russia at the request of the US.
Did that happen? Not likely!…
