Crude Falls Below $30 a Barrel for the First Time in 12 Years

There's a second effect. Companies that are near 100% indebted (and a dropping oil price will seriously lower their expected value, therefore getting them far closer to their debt limits even if they don't actually loan anything). Such companies, how do they respond to price shocks ? You have capital invested, and debt to pay back. But capital is a sunk cost, the debt won't disappear because you stop pumping. Therein lies the rub.

So there's 2 options:

1) you can stop working, stop producing, and use cash on hand (cashflow which they have spent years minimizing) to pay down debt. As soon as this cash on hand is gone, it's over.

2) they can keep working, and keep selling. Doing everything they can to increase revenue just a little bit (ie. selling more oil, making prices drop). This way the cash keeps flowing, even if they become less and less likely over the long term to pay back their debts, but they don't go under right now

Which would you pick ? Keep in mind that price of oil will of course go back up at some point. Wouldn't you want to delay the point where you have to give up, in hopes of delaying it past the point where prices recover and you don't have to give up at all ?

Of course not all companies will succeed at that. But the immediate result of oil companies becoming unprofitable due to price fluctuations is ... more oil getting pumped up. It makes sense if you think about it even if it is thoroughly counterintuitive.

I think "barrel" has become a unit of measure. Much of the oil runs through pipelines, to tankers, transported and offloaded to refineries.

It wouldn't surprise me if 90% of all oil was never in an actual barrel, but even if so, I would imagine the barrels are reused, and so not factored in the price.

I think we're going to see prices cycle like this for at least a few more swings. If there were no speculators in the oil markets you might see slightly more stable prices but there's a tremendous amount of speculation which adds to the price swings, which make the underlying activities more severe.

It takes anywhere from a couple of months to a couple of years to go from "acquired mineral rights" to "pumping oil out of the ground" which you can then sell. It also costs a lot of money. On the order of multiple tens of thousands per day on land and multiple hundreds of thousands per day at sea.

So when prices are up people are expanding and drilling and going gangbusters. When prices are down people are trying to figure out how to cut costs and ride it out. During high prices there tends to be "over" investment and during low prices, "under" investment, both relative to the average investment over say a 5-10 year period. Maybe by a lot.

As you mentioned one of the dynamics is that during low price periods alternative energy is a fool's errand and during high price periods it's genius. During average prices it'll slowly make more and more sense as the average price continues to slowly rise.

But it's far better in some ways to instead of making the average price on an average day to some times make a lot and some times make a little by letting the price vary wildly. Price instability makes alternative energy investing chaotic and unappealing to big institutional investors who might plow substantial money in. Better to wait until the chop settles down and it looks good over a 10+ year timeframe.

So if you get to make the average price on average and destabilize your competitors by letting the price wander all over, what's the downside? As long as you have the money to ride out the low price periods, none!

I don't know when this interesting ride will come to an end, but supply/price management is going to continue to be very important to people with a lot of oil left in the ground.

Alternatively, now that Tesla demonstrated that electric cars are better in most ways, $30/barrel makes them cheaper to produce.

It's not like they didn't have decades to diversify their economies.