The price of oil has finally started to obey the law. What law is that? The Law of Supply and Demand. Thanks to the US fracking boom that has done this (see chart) to US production, the supply of oil worldwide has outstripped demand since 2012. So why haven’t prices fallen before this summer? And are falling oil prices now a good thing? Or not?
US Oil Production- Source US EIA
While US production was exploding, other countries had level or declining production. Meanwhile consumption was falling in developed nations, but the developing world more than made up for that. Worldwide consumption has been steadily increasing since 2009. However, because of the US fracking boom, with the exception of 2011 supply has exceeded demand. Prices should have been declining since 2012, right?
World Oil Supply and Demand
After the oil price bubble peaked in 2008, the price of oil did crash when demand dropped. That drop in demand created a huge oversupply just as the US fracking boom was in its infancy. Then the Fed and its cohort central banks started printing money helter skelter in 2009. The results showed up not only in world stock markets but in commodities as well, particularly oil. The price of oil rose in spite of the fact that world oil production continued to outstrip demand. For the biggest speculators and financiers in the world, oil was a money substitute, a hedge against the massive money printing campaigns of the Fed, the BoJ, and the ECB. It worked for a while, and the oil market even helped in 2011 when supply fell below consumption for a year. But then the US production increase again overran world wide consumption.
The price of oil fell from around $107 to $85/BBL in early 2012 after the Fed had been on hold for a year. That along with other falling commodity prices was enough to spook the Fed into starting QE3. In spite of oil supply outgrowing demand from 2012 on, the price of oil returned to $107 concurrent with the money printing campaigns of the big central banks. With supply greater than demand for oil worldwide, the most logical explanation for this price increase is the inflationary effect of money printing as wealth holders again used crude oil as a money substitute.
