¶ … Oil replays 1980s bust discusses the collapse in oil prices in the mid-80s versus the collapse in oil prices in the second half of 2014. He notes that while the pace of decline was similar, than the reasons behind the decline are different. The author notes that time is an important variable. Prior to hydraulic fracking, oil projects were massive in scope and scale, and took many years and billions to bring to fruition. As a consequence of this, the supply of oil on world markets was fairly easy to predict. New oil would not suddenly materialize from just anywhere. Today, the time lapse between when oil is discovered and when it hits the market is much shorter, and the cost is lower. The wells in the shale fields are smaller, so the entire exploration and extraction cycle (i.e. The cash conversion cycle) is shortened considerably. This also encourages new money to get into oil, because the returns come faster. In the 1980s, there was a lot of new supply coming onto the markets, but the oil supply was still in the market as well. This created a glut, which combined with a sustained reduction in demand, drove prices lower. Ultimately, oil prices...
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