NCPA - National Center for Policy Analysis

Dispelling Misperceptions on Oil Prices

April 13, 2015

Dispelling Misperceptions on Oil Prices

Throughout the many years in which the media, consumers and investors have tried to understand the oil market, it is clear the truth is becoming more and more difficult to find as myths spread unchecked.

Top myths include:

  • Goldman Sachs can accurately predict oil prices. Goldman Sachs is famous for overestimating shifts in the market. In the time before the price of one barrel of oil fell to $40, Goldman Sachs was alerting clients and investors that the price could skyrocket to $150 or more.
  • Fracking's efficiency has led to the drop in oil prices. While advances such as horizontal drilling and hydraulic fracturing have indeed contributed to the decrease in gas prices, an even stronger pressure has been competition among fracking fleets. Due to its profitability and relatively low risk, banks have exerted strong pressure on oil producers to engage in extensive fracking campaigns. The influx of capital has created the influx of competition.
  • The Organization of the Petroleum Exporting Countries (OPEC) is crumbling. While there is a lot of internal strife among OPEC members, critical members such as Saudi Arabia, Kuwait and the United Arab Emirates (UAE) control more than half of OPEC's oil production. These critical members are also part of the Gulf Cooperation Council, which could theoretically be a better group to exercise internal control on oil prices than OPEC, since many countries such as Venezuela are advocating conceding market share to raise prices.
  • Shale wells can only supply oil for a few years. While it is true that the first couple of years are a well's most productive, wells can continue producing oil for 10 to 20 years afterwards. Typically, the first highly-lucrative years of a well's life are used to pay back the start-up costs.

Source: Dan Doyle "Top 12 Media Mythos on Oil Prices," Real Clear Energy, April 10, 2015


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