That’s the point. If the price of oil falls below its production cost nobody can run it at a profit. So nobody will want to run it.
At some point, the price of oil will rise and somebody might be tempted to resume production. But as I noted, OPEC has sent its message - if you start producing this oil we will dump oil and drive the price down.
This is just free market capitalism at work. None of the oil producing nations want to go back to a fixed price marketplace now that they’ve experienced the competitive environment.
OPEC actually has very little to do with it this time around. It’s mostly the combination of decreased demand plus increased US production.
Fracking has had a tremendous impact on production.
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFPUS2&f=A
We seem to be going in circles on this. If the price of oil falls below its cost of production nobody can run it at a profit. This applies to companies that have and companies that have not declared bancruptcy. Therefore this factor would not create a dropoff in production at the time that a bunch of producers declare bancruptcy. It might act as a brake on future development, as you suggest, but would not have a short-term impact, as many analysts seem to be suggesting.
This makes no sense and also contradicts numberous reports that many OPEC members are desperate to go back to a fixed price marketplace. (Possibly you meant this sarcastically?)
On a related note: OPEC concerned by oil drop, ready to talk to other producers
I think there is political pressure for them to say this, but they know that they can’t get all the nations to collude and those that don’t join the price fixing scheme will move more volume. Higher profits from lower volume is a wash, and their investment in producing more oil won’t be paying off.
Venezuela has a big problem-their oil is high viscosity; very few refineries can handle it. The light sweet crude (low sulphur) is what people want.
There has been increasing talk of Russia making some sort of coordinated cuts with OPEC, along with the usual hints and semi-denials etc. See e.g. Bloomberg - Are you a robot?. Apparently this has pushed up the prices a bit over the last few days, although they’re still significantly lower than when this thread started.
One argument I’ve seen pushed forward as a reason for the Russian reluctance is that for technical reasons (including but not limited to weather) their production is much harder to turn on and off than that of the OPEC nations. So they’re afraid that they will join in what is supposed to be a joint production cut only to have the OPEC nations (who have a history of cheating on their own quotas as it is) turn around and ramp production back up, with them unable to follow suit.
There are four scenarios for any country that produces oil.
Scenario 1 is that everyone produces as much oil as is profitable and then you make a small amount of money at today’s prices.
Scenario 2 is everyone cuts production and the price goes up and you make a large amount of money.
Scenario 3 is everyone promises to cut production and everyone except you does and the price goes up and you make a huge amount of money.
Scenario 4 is everyone promises to cut production and only you do and the price barely moves and you make a tiny amount of money.
Scenario 2 is the best scenario for the collective but every country secretly wants scenario 3 and is so afraid of scenario 4 that real cooperation is impossible. So scenario 1 is the only scenario that is in equilibrium and that is what happens.
OPEC has proven that its nations are not reliable and will defect whenever they can. Only Saudi Arabia has ever shown willingness to take one for the team and they seem no longer willing to do that. Russia would be stupid to enter into any agreement with OPEC that does not have OPEC cutting production first.