Cheap Oil Kills Oligopolies – The World Becomes A Better Place

Not All Shale Oil Is Equal

So Saudi Arabia has decided to pump more supply into a regime of falling oil prices. Embrace the positive. This is a good for humanity. Cheap energy makes your life more profitable.

Yet to hear mainstream economists observe this phenomenon you would think Night Wolf was about to eat The Moon Virgin. Ambrose Evans-Pritchard gives you a taste of the current Jeremiads being preached against an actual freer market in energy production.

The free market will now set the global cost of oil, leading to a new era of wild price swings and disorderly trading that benefits only the Mid-East petro-states with deepest pockets such as Saudi Arabia. If so, the weaker peripheral members such as Venezuela and Nigeria are being thrown to the wolves.

Perhaps Evans-Pritchard describes a transient state that would occur. In such a state, prices would temporarily whipsaw until they reached a new steady-state equilibrium. This is a commonly observed phenomenon in any sort of a complex system that is perturbed. At first, the consumers of a product don’t totally understand what it should cost when supply and demand constraints are perturbed. As a result, prices fluctuate until people producing and consuming the product in question better understand the market. Then things calm back down. Improved learning on the part of producers and consumers has a damping effect on price fluctutations.

Near-term Instability

This damping effect has the impact of making the price swings lose amplitude (become less frightening) as time marches on and ceteris becomes more paribus.* This will cause a market that we can better predict using Classical Microeconomic Theory of Prices. This gets us back to a Supply Curve inversely proportional to the availability of an asset. This is graphed against a Demand Curve that reflects the willingness of a consumer to buy the commodity in question at some price p.

Price Equilibrium

All things being equal, more supply forces the demand curve closer to the origin of a supply-demand equilibrium plot. This will invariably force the equilibrium price down. In the long term, having more oil available makes gasoline cheaper. Even Ayatollah Evans-Pritchard admits this will make most average consumers on the street better off.

Bank of America said the oil price crash is worth $1 trillion of stimulus for the global economy, …read more    

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