Oil Is Still Heading to $10 a Barrel
191
By
DYI
An oil price drop to below $20 per barrel would be a shock reminiscent of the dotcom collapse in the late 1990s and the subprime mortgage debacle that produced the 2008 financial crisis -- both of which triggered recessions. Of course, oil prices would not stay in the $10 to $20 barrel range indefinitely; recession would squeeze out excess energy production and prices would recover, likely to the average cost of new production. But the deflation that might accompany a worldwide economic downturn might mean the new equilibrium price for oil is between $40 and $50 a barrel -- well below the $82 average in the first half of this decade, and lower than the assumptions in the business plans of energy producers.
OPEC is a cartel and why oil could fall to $10
Cartels exist to keep prices above equilibrium-that's the only reason for that-and that encourages cheating; somebody in or out of the cartel wants more than their share and so the leader of the cartel's job is to cut its own production to accommodate the cheaters.
Well, the Saudis-the leader of the OPEC cartel-decided that they were not going to go along with that. They thought they could outlast others and when you're in a price war, the cost of meeting budgets isn't the number that counts. It's the point where free cash flow disappears and that in the Permian Basin in Texas is $10 to $20 a barrel and it's even less in the Persian Gulf.
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