The New Economics Of Oil

Via Brad Plumer comes a Citigroup research note arguing that the Peak Oil thesis is dying right now in North Dakota where shale oil production is surging.

I’m not sure I buy that, but it’s unambiguously true that the short-term supply situation now looks different than what we’ve come to expect in recent years. Recall that for a while we had the OPEC paradigm under which Saudi Arabia had oil that was cheap to extract but that it would hold off the market in order to boost the price.

Then if global supply was disrupted or demand surged, Saudi Arabia had the ability to open the spigots and prevent the price of gasoline from spiking. Alternatively, OPEC could deliberately throttle supply and push prices up. But in recent years that excess supply evaporated, creating a situation where global growth led naturally to big increases in gasoline prices. That has, of course, macroeconomic consequences. In particular, insofar as oil exporters like to recycle their earnings into U.S. Treasuries even at a time when the U.S. was operating under a zero interest rate policy, it served as a kind of passive monetary contraction. Demand for dollars and dollar equivalents would surge without an offsetting policy response from the United States.