The fall in oil prices has reached such drastic proportions that it is difficult not to psychologically associate the decline with economic crises. It is no surprise then that many warning and cautioning voices are starting to make themselves heard, asserting that the decrease in oil prices is threatening the global economy. Many US fracking companies are facing imminent ruin, as investments have to be scrapped, these doomsday scenarios allege. That, in turn, would send the financial markets into the abyss – as was the case in 2008.

Let there be no doubt about it: These scenarios could not be more wrong! The current situation has nothing to do with a run on murky derivatives based on a shoddy footing. The bankruptcies that are about to hit US exploration firms are part of a normal economic process. We are talking here about risk investments, identified as such, and for which losses are part of the calculations. It is clear that not all companies engaged in exploration will vanish off the face of the earth – those that will survive this round, will be able to make quite a decent buck.

The current price war is not the result of a decline in demand, which in turn would merit concerns about an imminent crisis. Instead, what we are witnessing is a technological advance – there is a reason it is called a shale “revolution” – that has unexpectedly enriched supply. The global cost leader is now busy assessing who is still capable of keeping up with its pace. And Saudi Arabia has made it clear that it intends to hang on to its market position and rid itself of any annoying competitor. It still remains unclear whether fracking will lose this battle. Its average cost has been estimated at about USD 70/bl, and there are quite a number of oil fields spread across the globe that require higher costs.

Instead, the decline in oil prices will in fact boost the global economy. Those funds that are no longer earmarked for energy and transportation will be spent elsewhere – a fact that will drive the domestic economies of countries dependent on oil imports. In addition, the weak euro means Europe has the upper hand from an export perspective.

A more troublesome scenario would be if, as was true in the first oil rush in the 1860s in the US and during the 1973/74 global oil crisis, crude suppliers joined hands and formed cartels in an effort to stabilise the market. Such efforts only serve specific interest groups. In the 19th century, the cartellisation bestowed the Rockefellers with immense wealth, while the oil crisis of 1974 marked the beginning of the recently ended OPEC era.

Daniel Stricker