How low can oil prices go? When pundits start competing to predict where the barrel will hit bottom, you know that a rebound is inevitable. It’s the inverse of what happens before a high-price bubble bursts. Only a few years ago forecasters were suggesting that oil might hit $300 a barrel.
The unpleasant reality is that petroleum prices are cyclical. Starting with the 1973-74 Arab oil embargo, they have been through six extremes. Because the peaks and the valleys both wreak financial havoc, producers and politicians imagine a Goldilocks ideal, with prices “just right”—not so high that legislators feel pressure to claw back “windfall profits,” and not so low that suppliers fall like dominoes, destroying jobs and tax revenue.
The latter is what we’re seeing now, with oil falling below $30 a barrel. Survey the damage so far: More than 100,000 jobs are gone, most of them last year. The number of shale rigs in service has collapsed by 60%. Banks are worried about their oil loans. Shale states are readjusting budgets for shortfalls. About $200 billion of oil and gas assets are up for sale world-wide.
American shale oil companies—whose booming production is a principal cause of the global glut—have been hit hard. Last year two dozen defaulted and 15 filed for bankruptcy. Standard & Poor’s puts junk ratings on three-fourths of the oil and gas producers it monitors.
Here’s the big question, the one that makes this cycle different: What happens to shale oil? The jobs and revenues from America’s newest industry literally kept the country out of recession during the years of tepid growth that have characterized the current administration.