Crude Volatility gives an overview of the global oil market and its dynamics with a focus on the US. The author discusses the nature of oil as a heavy fixed investment businesses with negligible marginal costs of production. In particular he discusses the boom bust cycles witnessed by the industry as a pure manifestation of volatile inelastic supply with inelastic demand. Crude volatility gives the history of oil investment and regulation in the US as well as the world more recently with the rise of OPEC and the author argues that the level of coordination of oil supply has major implications for oil price volatility and today's regime is no different than periods in the past, other than of course the supply side dynamics have changed.
The author gives a history of oil exploration and investment in the US from the 19th century onwards. Clearly the nature of investment was very different in scale in the 19th century with simple wells and basic onshore drilling techniques being used to exploit close to surface resources. But the quickly growing demand with inelastic was used to frame how prices moved sharply as oil became a staple commodity demanded with supply lagging demand increases. Such continual dynamics led to short cycles of boom and bust in the industry with price per barrel moving by orders of magnitude over the course of a year or less. The author discusses how the consolidation of the industry from Rockefeller led to stability and how such stability actually encouraged long term investment. The author also spends time on the unique situation of the texas era where investment was effectively legislated to contain the investment cycles for the benefit of all parties.
The author then details the history of OPEC and its growing importance as US supply became more constrained to grow. The history of global oil companies and their JV arrangements with local governments and the revenue share agreements is discussed to frame the early capex in places like the middle east. The author discusses how the political power shifted and how it eventually led to a nationalization of many oil resources which subsequently led to more frictions and eventually the oil shocks in the 70s. The author then goes into how the economic environment and the collapse of the Soviet Union led to a collapse in oil in the 80s and how with low prices the industry consolidated in the 90s to maintain efficiency. Again the reader is given a sense of how the boom bust cycles in the industry are an inevitable consequence of the inelastic nature of supply and demand. The author finally gets to the modern era and discusses the shale revolution and how to think about its impact. The author discusses how the nature of supply has become much more diversified and as a consequence this will impact oil volatility for the worse as when prices are low, production will continue as the diverse supply group needs to generate cash flows.
Crude Volatility gives a readable overview of the history of oil industry dynamics and its impact on oil volatility. The author argues that the industry needs to be consolidated or legislated to invest effectively and in the absence of those conditions the volatility of prices is inescapable to the detriment of many parties. The arguments are clear and are applicable to any heavy investment low marginal cost industries, but the case history of oil to make the arguments comes across clearly. Whether dynamics of the future will echo the past remains to be seen but one shouldn't be surprised to see more volatility on oil prices given the fragmented supply we currently see,
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