This paper aims to analyze the concept of supply based on the article “What Low Oil Prices Really Mean” by Hartmann and Sam published in Harvard Business Review.
The publication covers the topic of oil prices and their effect on the market. There are several key points mentioned. The first one is that the oil prices are carefully manipulated by the producers. The countries try to match their production to the aggregated demand of the oil market to avoid price drops. Sometimes, producers can also lower prices by increasing the supply. That can be useful to eliminate competition. The second one is that the recent development of shale oil extraction technology has disrupted the ability of the conventional producers to control the supply. Shale oil tends to be more expensive, but once the producers start to halt their output, the prices start to climb making shale oil and gas competitive.
Thus, the conventional producers cannot influence the market as much. They are limited by shale oil prices. That is the reason why the production freeze initiated in February was not effective. The third point is the situation presents new challenges for the oil-based economies. Many countries, like Saudi Arabia, Argentina, and China seek to implement shale technology, which will allow them to stay in business. Countries like Russia and Venezuela lack the reserves to avoid being affected by the price drops. They now face an acute economic crisis. The final fourth point is that for the consumers, on the other hand, the reduced oil prices are a huge benefit. For example, India managed to save 70$ billion on imports. Energy-intensive industries also prosper. Airlines traditionally barely make any profit, but with the cheap fuel, their profit margin rose to 15%. However, affordable oil negatively affects renewable energy usage. There is little reason to move away from traditional sources since they are cheap and efficient (Hartmann & Sam, 2016).
The concept of supply is closely related to the key points of the article. The interaction between supply and demand determines the prices in the market. If the demand is stable, the prices can be manipulated by providing higher or lower supply. Since the demand for oil is mostly stable at this time, that strategy used to be highly effective in the oil trade. That was a very powerful tool to control the market and eliminate any competition. Originally, the oil producing countries used to manipulate the supply of oil available to avoid the drop in prices. Their governments would freeze production and create an artificial deficit. That means that despite being able to provide more oil, they did not do it so that their supply could be sold at a higher price.
Nowadays, the shale producers have made that strategy inefficient. They limit the extent to which the supply can be limited to create demand. Since all of the oil-producing countries are working together to manipulate the supply, they need full market cooperation for their strategy to be efficient. The shale producers do not work with them. Instead, they are trying to compete by constantly refining their process and increasing the supply they can offer. That means that once the artificial deficit is created, it only increases the price to the level of the shale oil. Once the oil produced conventionally is as expensive as shale oil, the price stops to rise since there is no deficit anymore. At that price, the demand can be satisfied by the shale oil which costs as much. That is how the unconventional producers limit the effectiveness of the widely used supply manipulation strategy. The inability to use that strategy means that countries selling oil are suffering a crisis, and the countries importing the oil avoid a lot of expenses.
The US oil producers are one of the key reasons why the supply manipulation strategies no longer work in the oil market. The technology for unconventional production was created in the US. However, despite acting as a counterweight to the influence of the Organization of Petroleum Exporting Countries, the shale producers are suffering. In 2015, the OPEC has been trying to eliminate the new players in the market by keeping the process low. It has led to many of the American companies losing a lot of many and having their credit ratings reduced. However, despite the damage, the shale industry survived and now it can offer oil at a price closer to the competitive level (Hartmann, Jessen, Orr, Peterson, & Sam, 2016). That means that the US has largely counteracted the OPEC dominance in the oil market and harmed their ability to manipulate supply and create an artificial deficit.
On the other hand, in January, the US government started to sell oil again. Low prices hurt the American exporters who are trying to establish themselves in the international market. On the other hand, the US has more “tight” oil, which is being extracted by shale producers, than China or Argentina. Those countries are also starting the shale production to extract that oil. That means that the market will be filled with shale oil soon, and the artificial deficit strategy will be used again. This time, the United States will be able to utilize the supply manipulation technique since the country possesses 78 billion barrels of oil recoverable through shale extraction compared to 32 billion in China and 27 billion in Argentina (EIA, 2015). The higher amount of “tight” oil means that the US will be more comfortable playing with the market prices. Utilizing the superior extraction technology, the government will be able to flood the market with cheap oil or accumulate additional supply, which can be sold after freezing production and creating an artificial deficit. The risk of running out of oil and gas in the foreseeable future no longer exists, so effectively controlling the market will be a priority. Overall, the perspective looks really bright for the United States. However, it should be mentioned that renewable energy is no longer a priority for most countries. That can have a negative effect both on the US and on the world in general.
The article seems to present the subject matter well. All of the points are supported by evidence and seem logical. It is hard not to agree with the statement that innovation can counteract old market manipulation methods. It is really interesting how the companies can both raise and lower prices to fulfill their agenda. The article demonstrates that supply can be used as a powerful tool to control the market. It also showcases how innovation can become relevant even after it has been discarded as inefficient or too costly. That really underlines the importance of viewing the market in perspective and figuring out the long-term effect of various factors.
References
EIA. (2015). World Shale Resource Assessments. Web.
Hartman, B., Jessen, R., Orr, B., Peterson, R., & Sam, S. (2016). The New Balance of Power in Oil. Energy Journal, 2, 1-5.
Hartmann, B., & Sam, S. (2016). What Low Oil Prices Really Mean.Harvard Business Review. Web.