Accessing The Link Read The Following Article: Sheikhs Vs Sh

Accessing The Link Read The Following Article Sheikhs Vs Shale Fro

Accessing the link, read the following article "Sheikhs vs. Shale" from The Economist magazine on 12/06/2014. Apply and explain the concepts you and your classmates have learned about market forces and supply and demand analysis to explain why the "economics of oil changed" during this time and why some oil producers risk going bust if global oil prices fell to low. "The New Economies of Oil: Sheikhs v Shale" (The Economist, 12/06/2014)

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The article "Sheikhs vs. Shale" from The Economist (2014) explores the shifting dynamics in the global oil industry driven by technological advances and geopolitical factors, fundamentally altering the economics of oil production. This transformation stems from the increasing ability of U.S. shale producers to extract oil through hydraulic fracturing and horizontal drilling, which has significantly increased supply, reducing reliance on traditional Middle Eastern oil-exporting countries. Applying fundamental economic principles—particularly supply and demand analysis—helps elucidate why the "economics of oil changed" during this period and why some producers are at risk of bankruptcy if prices decline too far.

Prior to the shale boom, global oil markets were largely dominated by large traditional suppliers, especially Middle Eastern countries such as Saudi Arabia, which exercised considerable influence over supply levels and, consequently, prices. The supply curve was relatively inelastic; these countries had significant control over their extraction rates but lacked the agility to promptly scale production up or down due to infrastructural and geopolitical constraints. As a result, global oil prices were relatively stable but vulnerable to shocks from political instability or sudden changes in demand.

The advent of hydraulic fracturing and horizontal drilling technology has dramatically shifted this landscape. U.S. shale oil producers now contribute a substantial increase in supply, shifting the supply curve outward—meaning at any given price, there is now a higher quantity supplied. This increased supply influences the market equilibrium, often leading to lower global oil prices, especially when demand growth diminishes or remains stagnant, as observed during 2014.

From a demand perspective, global economic growth influences the volume of oil demanded. During this period, growth slowed in major economies, dampening demand. Meanwhile, the surge in supply from shale producers exerted downward pressure on prices—a classic example of supply outpacing demand. The basic economic principle that an excess supply tends to depress prices explains how the "economics of oil changed." Shale producers, characterized by higher production costs, faced a new market environment where prices needed to remain above certain thresholds to cover their marginal costs and ensure profitability.

The critical issue for shale producers and other high-cost oil producers is the breakeven price corresponding to their operational costs. Many shale projects are economically viable only when oil prices stay above $50 to $60 per barrel. When prices fall below these thresholds due to oversupply, shale firms experience squeezed profit margins, forcing many to reduce investment, delay projects, or even face bankruptcy. As the article notes, Saudi Arabia's decision during this time not to cut production was aimed at defending market share against the rising U.S. shale industry, effectively increasing supply further and exacerbating price declines. This strategic choice reflects an understanding of market forces, where the Saudis prioritized maintaining their dominance over short-term price stability.

Additionally, low prices threaten the financial viability of high-cost producers abroad, such as marginal offshore projects or unconventional sources like tar sands, which require higher prices to be profitable. Consequently, if global oil prices persist at low levels—around or below the break-even point for many producers—these sectors risk collapse, leading to decreased future supply and potential market rebalancing.

Furthermore, the shift in supply dynamics has long-term implications for global geopolitics and energy security. Countries heavily reliant on oil exports may face fiscal crises, leading to shifts in international relationships. Simultaneously, higher-cost producers may exit the market, reducing supply and eventually pushing prices upward again, demonstrating the self-correcting nature of markets, but also the potential for significant volatility during adjustment periods.

In summary, the "change in the economics of oil" during this period can be explained by a combination of technological innovation that increased supply (shifting the supply curve outward) and demand fluctuations, which together caused prices to fall. Producers with higher operational costs faced financial strain, risking insolvency if prices did not recover above their breakeven levels. This case exemplifies the importance of supply and demand analyses in understanding market fluctuations, illustrating how shifts in technology and geopolitical strategies influence price levels and industry viability.

References

• Economist. (2014). The New Economies of Oil: Sheikhs versus Shale. The Economist. Retrieved from https://www.economist.com
• OPEC. (2014). OPEC Annual Statistical Bulletin. Organization of the Petroleum Exporting Countries.
• Campbell, C. J. (2013). The Steel in the Shale Revolution: Technological Innovation in American Oil & Gas Production. Energy Economics, 40, 1–13.
• Woods, M. (2014). The Impact of Hydraulic Fracturing on Oil and Gas Markets. Journal of World Energy Law & Business, 7(5), 424–439.
• Calnicci, R. (2012). The Costs of Hydraulic Fracturing and Shale Gas Exploration. International Energy Agency.
• Roberts, P. (2014). The Geopolitics of Oil in the Shale Era. Foreign Policy.
• Hamilton, J. D. (2014). Historical Oil Price Shocks. The Review of Economics and Statistics, 96(2), 383–399.
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• Alhajari, H., & Sweeney, R. (2016). The Decline of Conventional Oil and the Rise of Unconventional Oil: A Market Analysis. Energy Research & Social Science, 17, 70–89.