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Falling Oil Prices: Where Is the Floor?

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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, International Association for Energy Economics, vol. 0(Number 4), pages 37-50.
    • Handle: RePEc:aen:journl:1986v07-04-a02
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    Cited by:

    1. Dahl, Carol & Duggan, Thomas E., 1996. "U.S. energy product supply elasticities: A survey and application to the U.S. oil market," Resource and Energy Economics, Elsevier, vol. 18(3), pages 243-263, October.
    2. Harry R. Clarke & William J. Reed, 1990. "Applications of Optimal Stopping in Resource Economics," The Economic Record, The Economic Society of Australia, vol. 66(3), pages 254-265, September.

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    JEL classification:

    • F0 - International Economics - - General

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