Market Watch
Opinion: Will oil be so cheap that it won’t pay to pump it out of the ground?
The price of coal has plunged since 2008 because environmental regulations and competition from other energy sources have reduced demand. Could the same thing happen to petroleum?
LONDON (Project Syndicate) – The conventional wisdom regarding the recent plunge in the price of oil CLH6, +1.97% is that we are seeing a repeat of the 1985-1986 collapse, when Saudi Arabia ramped up production as part of a dispute with other members of the Organization of Petroleum Exporting Countries cartel. This time, the thinking goes, Saudi Arabia is doing the same in response to its loss of market share to shale-oil production in the United States.
But there is another parallel that is even more relevant — with important implications for the long-term price of oil. The recent collapse is reminiscent of a similar dive in the price of coal — which crashed from a brief high of $140 a ton in 2008 to about $40 a ton today — which led some deposits to become “financially stranded,” meaning that the cost of developing them outweighs potential returns.
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