The Energy Sector
using ceramic pellets instead of cheap
sand for fracking). Moreover, OPEC
members are not universally aligned
in their goals. For instance, the OPEC
cartel members each have different
“break-even” prices for balancing their
budgets; more specifically, Saudi Arabia
can afford to keep oil cheap longer
than its geopolitical rival, Iran. Given
these complications, OPEC decided
to maintain a high-supply, cheap oil
environment, with some commentators
even suggesting a “price-war” against
US fracking operations.
Demand
Going back to the supply-and-demand
graph, our economics student might also
wonder if the price drop in oil could
be explained by a lower demand. On
the surface, there is no obvious reason
to presume a lower demand for oil.
The IMF hasn’t projected huge rates
of global growth, but even uneven
global growth targets of 3.3% and the
assumed increase in global affluence
and a developing middle class should
still support increased demand for oil.
After greater consideration, however, we
must realize prices are often a reflection
of market expectations for demand and
supply in the future. In other words, if
the expectation of global growth falls,
that looks like a decrease in the projected
demand. For instance, if expectations
for GDP growth in China were to fall
from an assumption of 8% growth
to a more modest, for an emerging
market country, 4% growth, we must
understand the Chinese economy is
still growing, but commodity prices
were set wi Ѡ