The oil price collapse has taught us a lesson about the dangers of overestimating the influence of political machinations on markets.
The assumption that politics, whether Saudi manipulation or collusion in the Opec oil producers’ cartel, would keep prices eternally above $100 a barrel was proved wrong. Now people are flipping to an opposite view, where market forces are king and politics no longer matters. Instead of reading the tea leaves in Riyadh and Vienna, they are focusing narrowly on how commodities and capital markets will adjust to low prices — which in isolation is just as wrong and just as dangerous.
Politics still shapes the oil price. Many states that depend on low-cost oil exports for revenue, such as the United Arab Emirates and Iraq, will face long-run budget challenges if prices remain depressed near their current $50 a barrel. For now, most are unable to boost earnings by increasing output since they lack spare production capacity that can be put to work quickly. But over a longer period new investment is possible. It may be collectively foolish for a group of exporters to boost production, further weakening prices, in the long run; that does not mean it will not happen.