This inelasticity can cause wild price swings if the market is either undersupplied or oversupplied. With the market currently oversupplied by 1% to 2%, prices have dropped rapidly. The only way to fix the problem is to bring supply more in line with demand by lowering oil production.
Normally, it is OPEC’s role to lower production when the world is producing too much, but by doing this over the last few decades its global market share has fallen from about 50% in the 1980’s to roughly 33% today. It is sick of losing share and is standing firm on keeping production at 30 million barrels per day no matter the price.
Saudi Oil Minister Ali Al-Naimi even said the organization would ride out the storm if oil falls to $20 per barrel.
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Factset: FactSet Research Systems Inc. 2015. All rights reserved.
Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.
