President Trump has claimed that recent decline in oil prices is thanks to him and his actions. He might well be right in the shortest possible short-term sense, but it’s just as likely that George P. Mitchell is responsible. Mitchell is known as the “father of fracking,” and it’s that technology that is the real driver of the global oil price these days.
In that short term, perhaps a couple weeks to a couple of months, it’s geopolitics more than anything else driving the price. The sanctions announced against Iran mean some nations aren’t going to be able to import from their traditional supplier. The waivers some have received mean there’s less worry there now. All of this happens much faster than anyone can curb or ramp up production, or send a ship of oil one way or another, and is thus what drives those prices in that short term.
So Trump is fair enough in claiming responsibility for those very short term price movements, as he is so claiming.
Anything longer term than that, Trump is probably not responsible. By far the largest influence on the global oil price is fracking. The vast bulk of oil production comes from more conventional fields. But with a commodity like oil the price is determined at the margin — it’s the last supply meeting the last demand that determines the overall price. That swing production is indeed fracking these days.
The underlying change is very much larger than near anyone realizes. Oil fields have traditionally been truly massive projects, taking a decade just in the preparation. They would produce for several, if not many, decades after they open. Once they do produce, they simply keep doing so; there is no tap to turn off. That is, oil supply was pretty static in any short term (inelastic in the economic jargon). We couldn’t quickly increase it in response to a change in price.
Oil demand is also famously inelastic. It doesn’t change much in relation to price. If you’re set up to use oil, from the commute to the office to generating electricity from it, then you tend to need to use it whatever the price. It’s only in the medium- to longer-term that consumption changes — as people buy new cars, move houses, rebuild generating plants.
To an economist, the oil market looks like inelastic supply meeting inelastic demand — therefore there are going to be wild price swings. A small change in the underlying conditions on either side (a war knocks out a producer, or economic growth increases demand, or a recession lowers it) will be reflected in the oil price halving or doubling.
Fracking changes that entirely. A fracking well can be online in a couple of months. It costs a few million, not a few billion, to get up and running. Supply from any one well lasts maybe 18 months in any volume, not decades. We’re in an elastic supply situation now. That changes the market entirely. Instead of wild price swings, we see changes in the number of wells being fracked.
Fracking is now the marginal producer and thus the determinant of the global oil price (in anything longer than a matter of weeks), so we’re not going to have those wild price changes of the past, which is a very large change in that oil market — even a change in geopolitics.
OPEC still has power but no longer the ability to put oil up to $150 a barrel and then keep it there. We’ve really moved oil production over from being a pure commodity business to being much more akin to manufacturing. We just don’t need to plan vast projects to get more; we can leave it to independent drillers to drive a few thousand more wells if prices justify it. And they will, within months.
Politicians and politics may well be what determine oil prices for a few months. But after that it’s George P. Mitchell and the fracking he championed, if not quite invented, which is the major influence on the medium- and long-term oil price.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
