The current price of $50/bbl will prove indefensible if U.S. shale oil production resumes soaring and the world economy remains sluggish for any length of time.
The announcement by Saudi Minister Salman that his country would make a voluntary production cut of 1 mb/d has some people speculating (or joking) that Saudi Arabia will take up the role of swing producer for OPEC+, a role it abandoned in late 1985. Although it is possible that at some point in the future the country will again act as swing producer, its behavior now is very different from that in the early 1980s, when Saudi production collapsed to below 3 mb/d.
After the Iranian Oil Crisis, when oil prices roughly tripled, prices were roughly five times the historic mean, as the figure below shows. Even without assuming mean reversion, it should have been obvious to nearly all that the price was to high, but in fact, the overwhelming consensus was for ever-higher prices. At Energy Modeling Forum 6, a comparison of computer models of the oil market held in the early 1980s at Stanford, the average price forecast for 2000 was $175/barrel (2019$) and none of the ten was below $100. (The forecast my boss, Nazli Choucri, submitted was arguably the best but hardly one to brag about — we didn’t have to outrace the bear, just the other hikers.)
And while the pre-pandemic oil price was well above the historic mean, it was near the average of the past three decades, which admittedly included some unusual years. The current price of $50 will prove indefensible if a) U.S. shale oil production resumes soaring and b) the world economy is slow to mount a Covid recovery.
A further difference is the nature of the announcement, which made it clear that the cut was in response to the second wave of covid19 infections, not to a fundamental market imbalance. Unlike the early 1980s, the Saudis have not agreed to act as swing producer, which involved setting a price and letting customers buy or not as necessary (or, too often, not). While the other producers surely welcome Minister Salman’s decision, they would hardly expect the stance to represent a lasting policy change, rather than a one-off response to an unusual situation.
So, what is occurring now more resembles putting up sandbags to defend against a hundred-year storm surge, whereas the early 1980s policy would be closer to trying to protect against the daily high tide. It does strengthen the view of the Saudi government as wishes to keep prices in a moderate range but shouldn’t be taken as evidence of their long-term oil price goals — or even that they have them.