The Oil Price Domino In Motion

IL markets are fundamentally risk-avid and react obsessively in times of geopolitical unrest, ignoring other factors.

- RANJAN TANDON

Historically rising prices and volatility recalibrate political equations aimed at wresting economic advantage. In this light, we can see the current slide in oil prices as steering a broader détente and seeking new multilateral alliances.

Taming inflation was the high point of Donald Trump's campaign. However, his enthusiasm to cool oil prices distracted him from the ramifications of very low prices on the US economy and beyond.

In 2024, higher prices encouraged American Permian Basin producers to maintain a high active rig count despite the average breakeven of $62 a barrel in the Midland Basin and around $64 in the Delaware Basin—the most prolific regions. Mind that no single price can be determined as profitable across the US shale spectrum, as a host of variables such as operating costs, ease of extraction, and drilling and material costs determine profitability across companies and terrains. Nevertheless, the present fall in West Texas Intermediate prices will compel a reduction of production targets, decelerating last year's shale growth.

The past reveals what may transpire in the future. As oil prices fell in 1982, Saudi Arabia resorted to production cuts. Other OPEC countries began cheating and discounted their oil to maintain shares as the market witnessed a glut. By August 1985, Saudi Arabia's production plummeted to 25 percent of its 1981 output of 10 million barrels per day, in a strategic bid to maintain prices in a sluggish world market. The crash of 1985-86, when prices dipped more than 60 percent, underlined the failed efforts.