Oil took a dive south again this week, going below $50/barrel yesterday. As we’ve discussed before, the American “fracker” is now the marginal supplier–ready to turn on the spigots at the first sign of a higher price. In an introductory Econ course, we’ll review what is often called “perfect competition,” or more appropriately, a price-taker market. One of the central tenets of this model is that it will be characterized by price equaling the marginal cost. So if the marginal cost of production is $45, and the current market price is $50, production will expand until the price equals marginal cost.
The Saudi’s big gamble was that they could kill the American fracker, and they failed in that effort. This week’s price action in the market price of oil simply confirmed this thesis: U.S. stockpiles of oil rose dramatically despite the ongoing OPEC output cuts. Further, the frackers are moving out with big expansion plans in the months ahead. The price of oil will no longer be determined (at least over the longer term) by OPEC. The price will be determined by the marginal cost of the American frackers–and that cost continues to decline. And with “open up the pipelines” Trump (provided they use U.S. steel!) in charge, this is likely to be the case going forward.
I haven’t felt this good about oil since 1986, when the price of a gallon of gas fell from $1.50 to $.50. With the price of oil likely not covering the Saudis’ cost of governance, perhaps they won’t have $$ to send to madrassas across the world to foment jihad?