The 'hog cycle' will eventually mean a much higher price for oil
If, like me, you learned your economics in the 1970s, you know about the ‘hog cycle’. When pork prices fall, farmers decide to raise fewer piglets because their business is unprofitable. A year or so later, there’s a shortage of pork and price rise again. Agricultural commodities, particularly those with long gaps between planting and harvesting are subject to regular and broadly predictable swings in price. (Today's economists, who are taught that rational expectations mean that farmers will predict the eventual rise in price, seem never to be taught about the hog cycle because it now disturbs the standard economic model).
I suspect we are seeing a hog cycle in crude oil. The current low prices will stifle investment, unproductive fields will be shut and exploration will atrophy. The logical and entirely forecastable result will be a sharp rise in the cost of crude when the slow decline of output from existing fields ends inexorably in demand exceeding supply, perhaps in three or four years time.
Of course this is a not a new idea. The economist Paul Krugman said exactly the same in 2001 as the oil price slide from $30 to $17 a barrel. (Recommended reading). And he was right. As we know, by early 2014 the price was over $100. They’re not fools, these Saudis, they are simply trying to recreate the hog cycle for the oil market again.