The Effect On Price Volatility Of Increases In Speculations In Oil Futures Markets S: Fill & Download for Free

This perhaps the worst investment plan I have heard since buying dot com stocks before the popping of the Dot-com bubble .What can go wrong ? You may likely lose everything. If you want to keep all your fingers never grab a falling knife as oil prices will crater an unknowable amount for an unknowable amount of time.I repeat never, never gamble and speculate on commodities especially oil. You are not smarter than the sharks out there as these sharks rely on others to eat.The advent of USA shale oil fracking has led to low oil prices for the foreseeable future which will reduce oil related investment capital while increasing the risk premium for this investment capital.The Saudis are going insure that this low oil price drop lasts for quite sometime probably for several years to come. The Saudis are going to attempt to and probably bankrupt many USA shale producers and their investors. USA shale production is the threat that the Saudis are trying to contain.The USA shale producers rely on leverage, borrowed money from the banks, seed capital from investors and moderate to high oil prices to stay solvent.The Saudi induced price drop will last long enough to exhaust oil pricing hedges, last long enough to cause banks to tighten credit, last long enough to cause investors to seek greener pastures and last long enough to reverse the growth of USA shale oil production. The price drop will last until it gets these needed results. This will probably take 6 months to upwards of two years depending on the oil marketplace reaction. Most USA shale oil production is hedged 6 months out dropping steadily to very low levels after 1 year. As these hedges expire there is no place to hide for the higher cost USA shale oil producers who will scale back or shutdown operations.After oil prices rise again, the banks and investors will likely not fund USA shale producers again because they know if they do, the Saudis will screw them again. It is not a question of if but when.The Saudis can not absolutely control the long term price of oil but they can inject oil price volatility into the market which impacts the risk analysis and increases the margin of safety demanded by investors to fund new oil exploration anywhere. For instance now some oil futures contracts are selling in the $30 range which would have been unthinkable 1 year ago. This is because the implied long-term oil price volatility has increased. The Saudis are just trying to contain the growing global production of oil as best they can. This growing global production is negatively impacting future Saudi wealth.This is how business and economics works in the real world. So here we are at the present, a guaranteed glut of oil supply courtesy of the Saudis and OPEC for the near term future. So what is the likely oil price going forward to achieve the required Saudis goals ?The most important fact is the cost of Saudi production is between $10 and $15 a barrel.Many USA shale fracking operations have costs approaching $60 to 70 / barrel funded with borrowed money.Some USA shale fracking operations have costs as low as $40 / barrel. The likely Saudi price target is likely in the mid 40's for this reason as it will severely curtail most if not all USA shale fracking as well as high cost oil production elsewhere in the world. These highly leveraged players all around the globe will likely fold in the coming years as investment capital flees and banks do not ante up with loans to fund continuing operations.This is the sole reason why the Saudis will deliberately leave prices low for a few years to caution future investors in funding new USA shale fracking operations. This is how the capital markets function, they operate on risk, reward and the expected future returns.The Saudis have let everyone know that they will not tolerate high cost producers in the oil market ever again. So if oil prices ever trend back up to $100 barrel expect the shale oil producers to be sleeping with one eye open. Until USA shale production costs come down to a level lower than the Saudis are willing to produce at, the Saudis will remain in control.On the geopolitical side we have the oil price numbers for each nation for national budget break even levels$80 / barrel for the Saudis$105 / barrel for the Russians$125 / barrel for Venezuelaand Iran is in a world of hurt begging at the bargaining table for sanction relief. The Saudis have the luxury of surplus to tap in the coming years be able to withstand a prolonged deficit. The Saudis couldn't care less if the knife twists a little deeper in Iran.As of 1/6/2015 oil is below $50, and the process is accelerating which is great for the USA and the Saudis because the Russians and the Iranians will surrender sooner as opposed to later because they know at this point the Saudis have won. Delay in negotiating with the West will just increase the financial pain without any benefits.The Saudis have enough fiscal sovereign reserves to play this game for a few years even if oil drops to $20. The Saudis have repeatedly publicly stated this just to assure investors and markets know they are not bluffing. Clarity and certainty of purpose is honored in the marketplace.More details are found in the enclosed article below.Sheikhs v shaleThis near-40% plunge is thanks partly to the sluggish world economy, which is consuming less oil than markets had anticipated, and partly to OPEC itself, which has produced more than markets expected. But the main culprits are the oilmen of North Dakota and Texas. Over the past four years, as the price hovered around $110 a barrel, they have set about extracting oil from shale formations previously considered unviable. Their manic drilling—they have completed perhaps 20,000 new wells since 2010, more than ten times Saudi Arabia’s tally—has boosted America’s oil production by a third, to nearly 9m barrels a day (b/d). That is just 1m b/d short of Saudi Arabia’s output. The contest between the shalemen and the sheikhs has tipped the world from a shortage of oil to a surplus.Fuel injectionCheaper oil should act like a shot of adrenalin to global growth. A $40 price cut shifts some $1.3 trillion from producers to consumers. The typical American motorist, who spent $3,000 in 2013 at the pumps, might be $800 a year better off—equivalent to a 2% pay rise. Big importing countries such as the euro area, India, Japan and Turkey are enjoying especially big windfalls. Since this money is likely to be spent rather than stashed in a sovereign-wealth fund, global GDP should rise. The falling oil price will reduce already-low inflation still further, and so may encourage central bankers towards looser monetary policy. The Federal Reserve will put off raising interest rates for longer; the European Central Bank will act more boldly to ward off deflation by buying sovereign bonds.There will, of course, be losers (see article). Oil-producing countries whose budgets depend on high prices are in particular trouble. The rouble tumbled this week as Russia’s prospects darkened further. Nigeria has been forced to raise interest rates and devalue the naira. Venezuela looks ever closer to defaulting on its debt. The spectre of defaults and the speed and scale of the price plunge have unnerved financial markets. But the overall economic effect of cheaper oil is clearly positive.Just how positive will depend on how long the price stays low. That is the subject of a continuing tussle between OPEC and the shale-drillers. Several members of the cartel want it to cut its output, in the hope of pushing the price back up again. But Saudi Arabia, in particular, seems mindful of the experience of the 1970s, when a big leap in the price prompted huge investments in new fields, leading to a decade-long glut. Instead, the Saudis seem to be pushing a different tactic: let the price fall and put high-cost producers out of business. That should soon crimp supply, causing prices to rise.There are signs that such a shake-out is already under way. The share prices of firms that specialise in shale oil have been swooning. Many of them are up to their derricks in debt. Even before the oil price started falling, most were investing more in new wells than they were making from their existing ones. With their revenues now dropping fast, they will find themselves overstretched.A rash of bankruptcies is likely. That, in turn, would bespatter shale oil’s reputation among investors. Even survivors may find the markets closed for some time, forcing them to rein in their expenditure to match the cash they generate from selling oil. Since shale-oil wells are short-lived (output can fall by 60-70% in the first year), any slowdown in investment will quickly translate into falling production.This shake-out will be painful. But in the long run the shale industry’s future seems assured. Fracking, in which a mixture of water, sand and chemicals is injected into shale formations to release oil, is a relatively young technology, and it is still making big gains in efficiency. IHS, a research firm, reckons the cost of a typical project has fallen from $70 per barrel produced to $57 in the past year, as oilmen have learned how to drill wells faster and to extract more oil from each one.The firms that weather the current storm will have masses more shale to exploit. Drilling is just beginning (and may now be cut back) in the Niobrara formation in Colorado, for example, and the Mississippian Lime along the border between Oklahoma and Kansas. Nor need shale oil be a uniquely American phenomenon: there is similar geology all around the world, from China to the Czech Republic. Although no other country has quite the same combination of eager investors, experienced oilmen and pliable bureaucrats, the riches on offer must eventually induce shale-oil exploration elsewhere.Most important of all, investments in shale oil come in conveniently small increments.The big conventional oilfields that have not yet been tapped tend to be in inaccessible spots, deep below the ocean, high in the Arctic, or both. America’s Exxon Mobil and Russia’s Rosneft recently spent two months and $700m drilling a single well in the Kara Sea, north of Siberia. Although they found oil, developing it will take years and cost billions. By contrast, a shale-oil well can be drilled in as little as a week, at a cost of $1.5m. The shale firms know where the shale deposits are and it is pretty easy to hire new rigs; the only question is how many wells to drill. The whole business becomes a bit more like manufacturing drinks: whenever the world is thirsty, you crank up the bottling plant.Sheikh outSo the economics of oil have changed. The market will still be subject to political shocks: war in the Middle East or the overdue implosion of Vladimir Putin’s kleptocracy would send the price soaring. But, absent such an event, the oil price should be less vulnerable to shocks or manipulation. Even if the 3m extra b/d that the United States now pumps out is a tiny fraction of the 90m the world consumes, America’s shale is a genuine rival to Saudi Arabia as the world’s marginal producer. That should reduce the volatility not just of the oil price but also of the world economy. Oil and finance have proved themselves the only two industries able to tip the world into recession. At least one of them should in future be a bit more stable.

Crude Oil is one of the most liquid commodities in the market. According to the CME Group, more than $80 billion worth of oil is traded on a daily basis.This Crude Oil is used to power vehicles and machines around the first adviser. This liquidity has led to increased volatility in the oil futures market as investors use it as a hedging tool.In fact, today, oil is one of the main causes of market movements! In 2015, oil prices went down which led to the S&P and Dow to go down.This year, the price has recovered significantly which has led to an upward move in the market. Here are the four key steps you need to follow when you approach the crude oil trading.For individual traders, trading crude oil futures can seem intimidating or exciting or both. After all, you’re trading the highly volatile crude oil market alongside giant corporations, sovereign wealth funds, multi-billionaires, and other big players.ETFs have given some investors away to dip their toes in the energy market, but they have their own pros and cons.As with any kind of futures day trading, crude oil trading traditionally involvesrelatively high account balance minimumsthe possibility of unexpected lossesmargin callsthe need to use stop-loss orders to manage riskUnderstand the Main Movers of Oil PricesTo be successful in crude oil trading, you need to understand what moves it. Of course, being a commodity, the oil price is moved by demand and supply.An increase in supply leads to a reduction in price while an increase in demand leads to an increase in price. Now, it’s more complicated than this but the fundamentals remain similar.To understand the supply, you need to know where oil comes from. Essentially, it comes from OPEC and non-OPEC countries.It is consumed (demand) worldwide. Therefore, any happening that threatens oil supply such as conflict will lead to a shortage of oil and thus the reduction in price.For example, a few months ago, a Russian plane was downed by Turkey. Many believed that this would lead to conflict thus pushing the prices up.Here are a few things that will always move the price---This is released every Wednesday by EIA. An increase in inventory will lead to low prices.Comments by key political figures in oil such as Minister of The energy of Saudi Arabia.Comments by key oil professionals such as OPEC president.A strengthening dollar will lead to reduced prices.Economic data. For instance, the strengthening of the Chinese economy will lead to increased consumption and thus demand. This will push prices up.Geopolitical issues. Conflicts lead to increased prices.Understand the Market SentimentThe factors described above are purely fundamental in nature. The oil market, just like any other market does not work based on the fundamentals.Technical factors play an important role in determining how oil prices will move. Traders use technical indicators to determine market sentiment.For instance, the Relative Strength Index (RSI) is one of the most commonly used tool that determines the oversold or overbought positions.In the last few months, the oversupply concerns have not faded but the market sentiment is that oil price will continue to go up. As a trader, you need to have a good understanding of this.Read Books on OilAs a trader, reading is one thing that you can’t do without (and here you can find a good list of trading books.By reading books on crude oil, you will be in a good position to understand the historical background of the commodity.It will also help you understand how the commodity works and how the cycles have moved.There are many books on oil in the market today. Hot Commodities by Jim Rogers is one of the best books on oil.Rogers is an expert who founded The Quantum Fund with George Soros. Other books you can read are Trading and Investing in Crude Oil for Beginners.These books will give you a historic background on oil and the different cycles it has gone through.Develop a StrategyThis step assumes that you have some background in charting and trading. You should now create the strategy you will use to trade.This strategy should be holistic meaning you should combine the fundamental, technical, and sentimental analysis in it. After developing it, you should go ahead and backtest it.One strategy you can pursue is combining the WTI and Brent crude. Brent is the world’s benchmark while WTI is the United States standard. The two ‘oils’ move in the same direction.Therefore, you can buy and sell the two simultaneously with different lot sizes. Your profit will, therefore, be the difference between loss and profit.Trade crude oil a different way --- same excitement, manageable costsEvery time you put gas in your car (or motorcycle or scooter) you form an opinion about where gas prices are headed and, indirectly, the price trend in crude oil.However, day trading and swing trading are focused on the short-term fluctuations that last for minutes, hours, or a few days.The first Adviser binary options and option spreads are designed for trading short-term moves in volatile markets like crude oil.With durations from two hours to one week, these contracts let you trade without worrying about some of those downsides associated with futures trading---Minimum opening balance is just $250All binary options cost less than $100 eachYou set your maximum possible loss and profit before each trade, so you never lose more than you planned forAs a result, you don’t need a stop-loss and you can never get a margin call.Crude oil, precious metals, and stocks often move togetherFor decades, futures traders have known about a phenomenon not many outsiders are aware of.The price and volatility of crude oil often serve as harbingers of price action in gold and silver. The reasons for this are several.First, both oil and gold are traded in US dollars, so if the dollar rises, both these dollar-denominated commodities will drop in price.If the dollar drops, you’ll often see spurts of buying as oil traders seek to purchase as much as they can before their money loses more value.Second, gold is considered a hedge against inflation. Rising oil prices and inflation go hand in hand.So when oil prices go up, inflation tends to follow. And then, as investors buy gold in a flight to safety, gold prices rise as well.And what often happens when oil and gas prices rise and inflation goes up? The stock market expresses its collective opinion on what it perceives as changes in the strength of the economy.Especially on days when an economic number like the nonfarm payroll or the Fed’s interest rate is announced.If only you could simultaneously trade crude oil alongside gold, stock indexes, and economic events like the Fed announcement, all from one account.Actually, you can. On the first Adviser, you can trade all of those markets, taking short positions in some and long positions in others, for durations of a couple of hours or a couple of days.You can even trade the value of the US dollar versus other currencies at the same time.Trading Crude market calls on the first Adviser is Differentcompany binary options and option spreads offer an affordable way to try a variety of crude oil trading strategies and add them to your portfolio. You choose your maximum profit and loss upfront before you place the trade.You don’t have to worry about unexpected losses or margin calls, as you may find in other kinds of commodity trading. And you get risk management without needing to set a stop-loss.Check Out These Example Trades in Crude Oil ---Sell Crude Oil Binary OptionsHalf the movement in any market is downward, which means that much potential profit is to be found on the short side.Markets go up and down, so why shouldn’t you have the chance to profit both ways? Binary options give you a limited-risk way to learn and execute short selling in any market, including volatile markets like crude oil.Trade Crude Oil Futures with company Spreads for ProtectionProtect your futures trades with company Spreads instead of, or along with stop-loss orders for greater staying power.You are short one crude oil futures contract at 38.16. Instead of using stop-loss orders for protection, using an out of the money (OTM) spread can give you a hedge against loss while letting you stay in your position longer.what is at risk, and its causeAs the chart indicates, the typical supply function has numerous trading and risk mitigation options as companies try to track, monitor and mitigate risks across a wide mix of assets.Petroleum Production— Crude oil price hedgingRefining Operation—Crack Spread hedgingSpot Product Purchases – Spot market activity and price hedgingProduct Sales – Term and spot sale hedgingFor example, most companies view spot supply to be at risk, and often ignore the risk inherent in fixed-price term supply contracts, in-transit inventories, inventories in storage, and fixed-price sales agreements to their customers.The best supply and risk management programs are built on a very clear understanding of what creates risk and what risk the company is willing to take.Common Petroleum Risk TypesTransactions in any market come with a variety of risks, though to varying degrees. The most common risks addressed in crude and products trading include:Market risk -- The risk that a change in market dynamics, especially price will change the financial position of an oil company or trader.Basis risk -- The risk that the differential between prices of the same commodity in different markets.differences in delivery location or delivery time will affect the financial position of the oil company or trader.Credit risk -- The risk that a counterparty will not perform in accordance with the contract terms, either by failing to deliver the agreed upon commodity or to pay the agreed-upon price.Operational risk -- The risk that losses will be incurred due to errors or inadequacies in the various systems or processes necessary to structure, price, trade and management positions within the organization.Liquidity risk --- The risk that there is no counterparty quickly identified to accept an offsetting position.Then the organization may be saddled with assets or commitments – physical or financial – that it had not intended to keep.Market RiskThe interactions of price, supply, and demand make up the essence of what can cause market risk in the physical side of an oil company or trading organization.The skill and consistency of the traders is the key factor in helping manage this type of risk.Traders use two approaches to develop these skills and monitor the rapidly changing markets.The first is what is called fundamental analysis for crude oil and products. Often this technique, though important, is not dynamic enough for day-to-day decision making.Here traders use another way of looking at price volatility, called technical analysis. The core of the technical analysis is developing charts because it assumes that price movements form patterns that are repeated over time.A key premise is that the market has responded to all possible influences by the time it has signaled the response through price.Pure technical traders base their decisions on price trends instead of on factors that might influence supply and demand.In this case, the term used for the activity is to buy and sell the market. Another term that appears often in supply and trading is the basis.This usually means the difference or correlation between the price of a futures contract and that of its corresponding physical commodity.The fact that it does not, introduces an element of risk, called basis risk, into the simple hedge.This basis risk entails the simultaneous purchase of wet barrels and sale of paper barrels under a futures or forward contract.There are many reasons for the basis to become volatile.One of them is that few wet barrel deals exactly replicate the structured, formalized transactions available in the futures market.Even for matching crudes in matching locations, wet-barrel, and dry-barrel prices usually do not march precisely in step.Their trends track one another over time but individual price movements do not, causing wide basis changes.Credit Risk -- Before and AfterAs the chart indicates, prior to the collapse of Enron in late 2001, the majority of OTC-traded derivatives required an established line of credit in order for two counterparties to transact.Not only was Enron trading with parties A-B-C-D, they had simultaneous and interrelated credit obligations with each other.This structure limited the ability to determine any counterparty’s true credit exposure in a timely manner.The collapse of Enron, a major trading party, highlighted the vulnerability of the market to credit default risk.With trading volumes collapsing and general risk aversion in the market, the NYMEX seized on the opportunity to extend its dominant position in the energy futures markets into OTC instruments.The creation of the NYMEX Clearport system was a direct result of this aversion to credit risk.Clearportallows for OTC-traded derivatives to be entered into the exchange’s clearing system with the NYMEX as the counterparty to both sides of the transaction.In order for a counterparty to have access to this system, they must have an open account with an Exchange Clearing Member firm. Having OTC transactions cleared through the exchange:Mitigates credit risk.Provides for a daily settlement and margining process.Allows for aggregation of positions and cross-margining between futures and OTC products.The clearing of OTC products through the NYMEX Clearport the mechanism is a major reason for the meteoric rise in recent exchange volumes.Effective Trading and risk managementSupply and trading functions historically have balanced their supply networks by concentrating on optimizing physical moves.Today there are numerous paper instruments available to conduct business in a volatile environment and help S&T manage the risk.Forward trading bridges the difference between physical and futures trading or “wet” and “paper” barrels.Futures markets make the buying and selling of commodities more efficient by providing ---Instantaneous access to global movements in prices.Instruments to manage risk, allowing producers and consumers to focus on their core business.Incentives for speculators to enter the market with additional capital.Speculators operating especially in the over-the-counter (OTC)markets provide a valuable service to every commodity trading industry.They are willing at a price to accept and transfer a risk that cannot be accommodated with available futures and forwards hedging instruments.A key principle in managing the risk of an S&T function is to match all the physical and paper positions on a daily basis, and measure their current effectiveness.

The overall outlook is very good as fossil fuels will be a required part of the global economy for decades to come.A key factor is the overall outlook in the advent of USA shale oil production which is highly efficient, scalable, tunable, adjustable and responsive with respect to transient changes in oil supply and oil demand. In short USA shale oil production has changed the global oil market forever as USA shale oil production minimizes oil booms and busts simply because oil supply can instantly meet oil demand with minimal required capital investment.The advent of USA shale oil production will drastically reduce the global prices swings in oil prices, minimizing the scale of the oil boom and bust cycles. This in turn will make the global economy more productive and predictable. In return the medium and long term oil industry prospects for stable economic activity are very bright. No oil price booms per se but stable economic growth.In the short term for the next year or so there is negative to stagnant growth around the world with respect to oil production and capital investment. This includes the USA. This however is a prelude to a much healthier and viable oil production environment for decades to come.Jeff Ronne's answer to Why are oil prices falling and how long will low oil prices continue (2014 - 2016)?The Saudis are going insure that this low oil price drop lasts for quite sometime probably a year or two. The Saudis are going to attempt to and probably bankrupt many of the more speculative USA shale oil producers and their investors. USA shale oil production is the threat that the Saudis are trying to contain and manage in the long run.The most speculative USA shale oil producers rely on leverage, borrowed money from the banks, seed capital from investors and moderate to high oil prices to stay solvent.The Saudi induced price drop will last long enough to exhaust oil pricing hedges, last long enough to cause banks to tighten credit, last long enough to cause investors to seek greener pastures. The price drop will last until it gets these needed results. This will probably take 6 months to upwards of two years depending marketplace reaction. Most USA shale oil production is hedged 3 to 6 months out dropping steadily to very low levels after 1 year.The end goal of the Saudis is to remove the most speculative USA shale oil producers from the market thereby reducing competition for oil production.When oil prices rise again in a year or two, the banks and investors will likely not fund speculative USA shale oil producers again because they know if they do, the Saudis will screw them again. It is not a question of if but when.The Saudis can not absolutely control the long term price of oil but they can inject oil price volatility into the market which impacts the risk analysis and increases the margin of safety demanded by investors to fund new oil exploration anywhere. For instance now some oil futures contracts are selling in the $30 range which would have been unthinkable 1 year ago. This is because the implied long-term oil price volatility has increased. The Saudis are just trying to contain the growing global production of oil as best they can. This growing global production is negatively impacting future Saudi wealth.This is how business and economics works in the real world. So here we are at the present, a guaranteed glut of oil supply courtesy of the Saudis and OPEC for the near term future. So what is the likely oil price going forward to achieve the required Saudis goals ?The most important fact is the cost of Saudi production is between $10 and $15 a barrel. Many USA shale fracking operations have costs approaching $60 to 70 / barrel funded with borrowed money. Some USA shale fracking operations have costs as low as $40 / barrel.The likely Saudi price target is likely in the mid 40's for this reason as it will severely curtail most if not all USA shale oil fracking as well as high cost oil production elsewhere in the world.These highly leveraged players all around the globe will likely fold in the coming years as investment capital flees and banks do not ante up with loans to fund continuing operations.This is the sole reason why the Saudis will deliberately leave prices low for a few years to caution future investors in funding new USA shale fracking operations. This is how the capital markets function, they operate on risk, reward and the expected future returns.The Saudis have let everyone know that the Saudis will not tolerate high cost producers in the oil market. So if oil prices ever trend back up to $100 barrel expect USA shale oil producers to be sleeping with one eye open.Until USA shale oil production costs come down to a level lower than the Saudis are willing to produce at, the Saudis will remain in control having the final say as to the price floor for oil.As of 1/6/2015 oil is below $50, and the process is accelerating which is great for the USA and the Saudis because the Russians and the Iranians will surrender sooner as opposed to later because they know at this point the Saudis have won. Delay in negotiating with the West will just increase the financial pain without any benefits.The Saudis have enough fiscal sovereign reserves to play this game for a few years even if oil drops to $20. The Saudis have repeatedly publicly stated this just to assure investors and markets that they are not bluffing. Clarity and certainty of purpose is honored in the marketplace.More details are found in the enclosed article below.Sheikhs v shale This near-40% plunge is thanks partly to the sluggish world economy, which is consuming less oil than markets had anticipated, and partly to OPEC itself, which has produced more than markets expected. But the main culprits are the oilmen of North Dakota and Texas. Over the past four years, as the price hovered around $110 a barrel, they have set about extracting oil from shale formations previously considered unviable. Their manic drilling—they have completed perhaps 20,000 new wells since 2010, more than ten times Saudi Arabia’s tally—has boosted America’s oil production by a third, to nearly 9m barrels a day (b/d). That is just 1m b/d short of Saudi Arabia’s output. The contest between the shalemen and the sheikhs has tipped the world from a shortage of oil to a surplus.Fuel injectionCheaper oil should act like a shot of adrenalin to global growth. A $40 price cut shifts some $1.3 trillion from producers to consumers. The typical American motorist, who spent $3,000 in 2013 at the pumps, might be $800 a year better off—equivalent to a 2% pay rise. Big importing countries such as the euro area, India, Japan and Turkey are enjoying especially big windfalls. Since this money is likely to be spent rather than stashed in a sovereign-wealth fund, global GDP should rise. The falling oil price will reduce already-low inflation still further, and so may encourage central bankers towards looser monetary policy. The Federal Reserve will put off raising interest rates for longer; the European Central Bank will act more boldly to ward off deflation by buying sovereign bonds.There will, of course, be losers (see article). Oil-producing countries whose budgets depend on high prices are in particular trouble. The rouble tumbled this week as Russia’s prospects darkened further. Nigeria has been forced to raise interest rates and devalue the naira. Venezuela looks ever closer to defaulting on its debt. The spectre of defaults and the speed and scale of the price plunge have unnerved financial markets. But the overall economic effect of cheaper oil is clearly positive.Just how positive will depend on how long the price stays low. That is the subject of a continuing tussle between OPEC and the shale-drillers. Several members of the cartel want it to cut its output, in the hope of pushing the price back up again. But Saudi Arabia, in particular, seems mindful of the experience of the 1970s, when a big leap in the price prompted huge investments in new fields, leading to a decade-long glut. Instead, the Saudis seem to be pushing a different tactic: let the price fall and put high-cost producers out of business. That should soon crimp supply, causing prices to rise.There are signs that such a shake-out is already under way. The share prices of firms that specialise in shale oil have been swooning. Many of them are up to their derricks in debt. Even before the oil price started falling, most were investing more in new wells than they were making from their existing ones. With their revenues now dropping fast, they will find themselves overstretched.A rash of bankruptcies is likely. That, in turn, would bespatter shale oil’s reputation among investors. Even survivors may find the markets closed for some time, forcing them to rein in their expenditure to match the cash they generate from selling oil. Since shale-oil wells are short-lived (output can fall by 60-70% in the first year), any slowdown in investment will quickly translate into falling production.This shake-out will be painful. But in the long run the shale industry’s future seems assured. Fracking, in which a mixture of water, sand and chemicals is injected into shale formations to release oil, is a relatively young technology, and it is still making big gains in efficiency. IHS, a research firm, reckons the cost of a typical project has fallen from $70 per barrel produced to $57 in the past year, as oilmen have learned how to drill wells faster and to extract more oil from each one.The firms that weather the current storm will have masses more shale to exploit. Drilling is just beginning (and may now be cut back) in the Niobrara formation in Colorado, for example, and the Mississippian Lime along the border between Oklahoma and Kansas. Nor need shale oil be a uniquely American phenomenon: there is similar geology all around the world, from China to the Czech Republic. Although no other country has quite the same combination of eager investors, experienced oilmen and pliable bureaucrats, the riches on offer must eventually induce shale-oil exploration elsewhere.Most important of all, investments in shale oil come in conveniently small increments.The big conventional oilfields that have not yet been tapped tend to be in inaccessible spots, deep below the ocean, high in the Arctic, or both. America’s Exxon Mobil and Russia’s Rosneft recently spent two months and $700m drilling a single well in the Kara Sea, north of Siberia. Although they found oil, developing it will take years and cost billions. By contrast, a shale-oil well can be drilled in as little as a week, at a cost of $1.5m. The shale firms know where the shale deposits are and it is pretty easy to hire new rigs; the only question is how many wells to drill. The whole business becomes a bit more like manufacturing drinks: whenever the world is thirsty, you crank up the bottling plant.Sheikh outSo the economics of oil have changed. The market will still be subject to political shocks: war in the Middle East or the overdue implosion of Vladimir Putin’s kleptocracy would send the price soaring. But, absent such an event, the oil price should be less vulnerable to shocks or manipulation. Even if the 3m extra b/d that the United States now pumps out is a tiny fraction of the 90m the world consumes, America’s shale is a genuine rival to Saudi Arabia as the world’s marginal producer. That should reduce the volatility not just of the oil price but also of the world economy. Oil and finance have proved themselves the only two industries able to tip the world into recession. At least one of them should in future be a bit more stable.