Amid the Pandora’s box of woes opened up in the markets last week, there was at least one more cheerful sign: the plunge in the price of oil.
While cheaper oil is in part a symptom of sickly demand growth, an indicator of a weakening world economy, it is also a sign of healthy supply. While cheaper oil is in part a symptom of sickly demand growth as the world economy weakens, it is also a sign of healthy supply. US shale production has been rampant; exports from Libya have bounced back in spite of the country’s continuing chaos, and Saudi Arabia and other Gulf countries have signalled that they are in no rush to cut output to stabilise the market.
Their calculation is that lower prices now will choke back some rival suppliers, and encourage co-operation from the rest, including other members of Opec, the oil producers’ cartel, so that prices will be higher in the long run. We appear to be in one of those periods in the life of an oligopoly when lower prices are necessary to teach its members that they will all be better off if they maintain discipline and do not fight for market share.