An article I recently read sounded eerily reminiscent of the potato category. Written by Russell Gold and titled “Global Oil Glut Sends Prices Plunging,” the article appeared in The Wall Street Journal on Tuesday, Oct. 15, 2014. Following are excerpts from that article.
Oil prices posted their biggest one-day drop in nearly two years Tuesday as a U.S.-led wave of crude has crashed into weak global demand, threatening the stability of some countries…. Tuesday’s slide of 4.5 percent by U.S. crude oil to $81.84 a barrel left the price down 20 percent since the start of June. That was the lowest closing price since June 2012, and some analysts predict the price will fall as much as $10 a barrel lower.
The same factors that sank prices Tuesday are behind oil’s four-month tumble, which is pressuring countries from Russia to Iran to Venezuela. Worldwide demand is stagnant, and the IEA cut its full-year oil-demand growth forecast Tuesday to the lowest level in five years. Yet oil output remains high. In the U.S., hydraulic fracturing has unleashed a torrent of new crude that is flooding the market. U.S. output is expected to increase again this year.
Despite the steep drop in oil prices, the Organization of the Petroleum Exporting Countries (OPEC), which controls about one-third of global oil supplies, has been unwilling to rein in production. Saudi Arabia is focused on maintaining market share even if it means cutting prices.
Until recently, crude prices stayed high despite the rising supply because wars and civil strife created disruptions in the oil market. Now, though, “there is an abundance of geopolitical risk, but there is an even greater abundance of oil,” said Daniel Yergin, vice chairman of research firm IHS Inc.
The seeds of the supply shock were planted a little more than a decade ago in North Texas when U.S. companies pioneered horizontal drilling techniques combined with hydraulic fracturing technology. The result: wringing oil and gas out of rocks previously thought to be unworkable. Since 2004, U.S. oil production is up 56 percent, the equivalent of pumping an extra 3.1 million barrels a day on top of the regular U.S. oil output from traditional oil fields… However, U.S. demand for gas and other fuels is down 8 percent since 2004.
OPEC could face deepening internal rifts if prices remain low, because some members want to pump more to keep their coffers filled….
Of course, falling prices would eventually force companies and countries to cut production, many analysts predict. (Really?) But it isn’t clear who would make the first move. “We’re in uncertain territory” because the global oil market has changed so much in the past few years, aid Richard Mallison, an analyst with research firm Energy Aspects.
Does any of this sound at all like the potato category? Markets are always subject to the law of supply and demand. Like the physical laws of the universe, it is economic Isaac Newton; that is what the law of supply and demand is, and it cannot be defeated.
The answer is obvious and yet so difficult. Balance supplies with demand. New production within any area must be considered or oversupply will crash markets.
In commodities, it is virtually impossible to compete and win without a cost of goods advantage. Why is it so easy to see in others….yet so difficult to practice in our own category?