The most important characteristic of the US oil industry is inertia - or to put it another way, drilling and production respond sluggishly even to a large change in prices, John Kemp says.
John Kemp is a Reuters market analyst. The views expressed are his own
LONDON, Dec 15 (Reuters) - The most important characteristic of the U.S. oil industry is inertia - or to put it another way, drilling and production respond sluggishly even to a large change in prices.
Since 1974, there have been four episodes in which oil prices declined sharply over a relatively short time (ignoring the brief price spike and equally rapid reversal in 1990 associated with preparations for the first war between the United States and Iraq).
These price slumps occurred between (1) December 1985 and July 1986; (2) January 1997 and December 1998; (3) November 2000 and December 2001; and (4) July 2008 and February 2009 (http://link.reuters.com/weq63w).
In each case, the drop in prices was completed quickly, with the peak-to-trough move taking seven months, 23 months, 13 months and seven months respectively.
In the first three episodes, prices fell by about half (58 percent, 57 percent and 46 percent) though the most recent instance during the financial crisis saw a larger decline of around 72 percent.
Each decline in prices brought a downturn in domestic oil and gas drilling. But with the exception of the slump in 1986, the downturn in drilling was proportionately smaller than the fall in prices.
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