Oil Guru Explains The Cure For High Oil Prices In One Very Simple Paragraph

The FT’s Izabella Kaminska
flaggedan important nugget in this morning’s Schork Report from oil markets guru Stephen Schork.

It explains why massive oil discoveries like American Shale seemingly come from nowhere.

Schork recounts how his group was meeting with a prospective client in Vienna, home of OPEC, in 2008, when U.S. crude contracts had hit $US147 a barrel. The fund manager was convinced oil prices were going to stay high forever. Schork was not, and called him a “fool” for believing so.

They ended up not getting manager’s business — but it was probably for the best, since he’d clearly missed a central tenet of how markets work:

“Our expressed scepticism was (and still is) based on common economic sense that high prices are indeed the cure for high prices. The mirror of this economic axiomatic is… low prices are the cure for low prices, which in the case of our Viennese fund manager, led him to the false messiah of peak oil. The reason why no new significant oil deposits were discovered in the 1980s and 1990s is because… at $US20 a barrel it did not make any economic sense to go out and try and discover new oil.
In hindsight, you drive oil to $US147 barrel and lo and behold, five years hence the world is swimming in oil. It really is that simple.”

Earlier this week, we told you that the IEA is saying the world appears to be unprepared to deal with the steep production decline rates of shale wells.

But the takeaway from Schork’s anecdote is that, if prices do begin to rise, the industry will likely be able to come up with a way to increase the wells’ productivity.

And there’s a third lesson: to address climate change, the price of emitting carbon dioxide will have to be raised.

And we shouldn’t think — the Obama Administration, after all, did just make new coal plants 56% more expensive by imposing new emissions rules on them.

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