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Falling Oil Prices: Where Is the Floor?

Author

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  • James M. Griffin
  • Clifton T. Jones

Abstract

The recent precipitous decline in world oil prices from $28 per barrel in November 1985 to $12 per barrel in March 1986 has perplexed most industry analysts and OPEC watchers. As oil prices continue to deteriorate, the central question now seems to be: "Is there a price floor below which oil prices will not fall; and if so, where is it?" Economic theory would suggest that at some price level, short-run marginal extraction costs of oil will eventually exceed marginal revenues from that production, leading to the widespread abandonment of the relatively higher-cost oil wells currently operated by competitive producers in non-OPEC areas. Presumably, once the price of oil falls to this floor, massive production cutbacks in high-cost, non-OPEC areas due to abandonment and reductions in new drilling activity would enable the lower-cost OPEC producers to significantly expand their market shares, thereby eliminating any incentives for further price reductions.

Suggested Citation

  • James M. Griffin & Clifton T. Jones, 1986. "Falling Oil Prices: Where Is the Floor?," The Energy Journal, , vol. 7(4), pages 37-50, October.
    • Handle: RePEc:sae:enejou:v:7:y:1986:i:4:p:37-50
    DOI: 10.5547/ISSN0195-6574-EJ-Vol7-No4-2
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