Cheap Oil Kills Oligopolies – The World Becomes A Better Place

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
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
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, equal to a $730bn “tax cut” in 2015

Now there are people deeply bummed by cheaper oil. I don’t just mean Al Gore and [mc_name name=’Sen. Barbara Boxer (D-CA)’ chamber=’senate’ mcid=’B000711′ ] bemoaning the current fate of their massive stock holdings in Occidental Petroleum. Russia suffers deeply. They may need to crowd source the funding for their ongoing reconquista of the old SSRs and Warsaw Pact nations. Idiots and fools declare that the sky is falling. The rest of us that kind of like the fact that Maxim Gorky no longer operates as a state-funded resort are bathing in the tears.

We are also told that Venezuela and Iran feel duodenal butthurt over the extent to which prices have dropped below their national median break-even points. Toyota Motors will truly lament their ramp-up of Prius production if gasoline is sustainable at a price under $2/gal. This is all quite tragic – if you are Van Jones, Valerie Jarret or Walter Duranty’s Iniquitous Poltergeist.

There are some legitimately decent Americans who could temporarily suffer if crude oil prices actually test $40. Aaron Clarey (AKA Captain Capitalism) questions the financing of certain firms involved in Bakkan Shale production. He has a far better defense against the dark arts of accounting than I. I’d trust his analysis of a corporate balance sheet. Thus firms with heavy leverage who operate in high breakeven price tracts will probably flunk their Darwin Quiz when oil prices temporarily fluctuate in search of a stable equilibrium. I’d only argue contra Clarey that a very similar phenomenon occurred in Silicon Valley in 2000. We still enjoy the Internet today.

Not All Shale Oil Is Equal
Not All Shale Oil Is Equal

So there you have it. OPEC getting defenestrated because you can’t monopolize a commodity well absent scarcity is a fundamental good for the average American. Ignore the panic-mongers. If you’re personal balance sheet is lacking in equipoise, then is the change you’ve been hoping for. Sustained lower energy prices make the world we live in a better place. Embrace the positive.