We know that the price of oil has come down quite a bit over the past half a year, but just how bad is it, really? We decided to look back a quarter of a century for major slumps, and it turns out that the fall in crude prices from June to December 2014 was the fourth biggest drop since 1988, the earliest year for which we have data.The decline has been sharp as well.
What does history teach us? To begin with, oil slumps come in many shapes and sizes. Just as importantly, recoveries are highly varied as well. The Persian Gulf War in 1991 sent oil prices skyrocketing, and the end of that war sent prices crashing. It would take more than 12 years for oil prices to claw back at least 75 per cent of that drop. On the other hand, oil prices fell 40 per cent over 12 months beginning November 2000, but took only 10 months to get back 75 per cent of their loss.
At a press briefing on Jan 14, JP Morgan Asset Management's Asia chief market strategist, Tai Hui, reckoned that US$70 to US$110 per barrel was probably the long-term price range for oil, based on marginal production costs. But he cautioned against trying to pick a bottom for oil. He said that the production costs for key oil producing countries like Saudi Arabia are very low, giving them significant resilience in the face of low prices. The historical data, as mentioned, seems to back up that argument.