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Tuesday, October 20, 2015

BP: Fracking Has Changed the Economics of the Global Oil Market

From Forbes:
A fascinating little look at the economics of the oil market from BP in this paper here. It’s very much akin to the analysis I discussed here. The point being that fracking for tight oil has entirely changed the economics underlying the entire global oil market. And yes, it really is true that a change in technology like this can entirely change the economics of a global market. After all, Karl Marx really was right when he said that the technology of production determines social relations. 
The two essential points of the argument are as follows. The first being that those worries over climate change mean that we’re most unlikely, in any reasonable period of time at least, to use all of those reserves and resources that we already know about. It doesn’t particularly matter what we believe about climate change itself for this to be so: we can all see the political moves that are going to limit usage. That then means that oil is not a resource that is going to run out. It does not therefore become ever more expensive off into the future. 
But it’s fracking that is the real game changer here. The standard economic description of the oil market is one where both demand and supply are inelastic. This means that neither demand nor supply changes very much in reaction to a change in price. Or, the same thing said the other way around, a smallish change in either supply or demand can and will lead to vast changes in price. This is how something can go from $10 a barrel to $150 and back to $50 in a couple of decades.
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