Railsback's Petroleum Geoscience and Subsurface Geology

An explanation of the volatility of oil prices II

Supply and demand respond
Classical models quickly to change in price,
Demand
buffering change in price.
Demand-driven
Supply
Price
or
Supply-driven Demand
Supply
Price
Time The ideas presented here are largely
from an article titled How low can oil
go? by economist James Surowiecki
Demand decreases little in response to increase in price in the issue of The New Yorker for
because infrastructural change in transportation is slow. December 22 and 29, 2014.
Petroleum model
Supply
Demand
Price C
B
A. Industry with few rigs C. With price falling,
working and small ex- B. After increase companies continue or D. After long
ploration staff is slow in exploration increase production to period A. Industry with few rigs
to respond to small and drilling, maintain revenue, with little working and small ex-
increase in demand; supply increases increasing glut and exploration, ploration staff is slow
price increases greatly. and price decreases. causing further drop in supply falls and to respond to increase
price. Companies cut price increases. in price.
exploration staff. LBR PGSGVolatilityOfOilPriceII01.odg 8/2015