Gary North reminds us that the price of oil is volatile . . . 

Back in 2008, the price of oil plummeted from about $140 a barrel to about $40 a barrel. It bottomed in March 2009 at about $35. But it had been $40 a barrel in 2004. We forget how volatile the price of oil is. It can be wild.

We must not forget the 2008 was a disaster year for the world's economy. The world went into a recession. The United States began to recover in March or April 2009, and so did the price of oil. The price of oil mimicked remarkably the recession in terms of chronology, but it was wildly volatile, especially when compared with the economy in general. I look at the European economy, and it appears to be stagnating at best, but probably moving into work recession. China continues to grow, but it is clearly growing at a much slower pace. China is now exporting oil. In one month this year, September to October, exports went up 30%, while imports dropped 22%. These are huge reversals. I think the price of oil is a good barometer of the world's economy. I don't think what we're seeing here represents any fundamental change in the relationship between oil consumption and oil production. There has been increased production of shale oil in the United States, but the price repercussions of this did not hit until early this year. Furthermore, shale oil is basically a flash in the pan. It gets much more expensive very fast. It is not a long-term solution to America's oil problem, or any other nation's oil problem. Consumption continues to rise, because China and India continue to expand economically. China now has the largest automobile market in the world. This is not going to change unless there is a serious recession in China. So, with respect to consumption, demand continues to increase. As prices fall, demand will increase even more. More oil will be demanded at a lower price. The thirst for oil will continue unabated for at least another decade, and probably longer. Unless there is a major breakthrough technologically, which must be matched by an enormous commitment to infrastructure to deliver whatever the new energy source is, oil is going to continue to be in heavy demand. There are not going to be major discoveries. Ambrose Evans-Pritchard wrote in August: The major companies are struggling to find viable reserves, forcing them take on ever more leverage to explore in marginal basins, often gambling that much higher prices in the future will come to the rescue. Global output of conventional oil peaked in 2005 despite huge investment. Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000. "The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120," he said. These companies are being hammered at the margin. The International Energy Agency in Paris says global investment in fossil fuel supply rose from $400bn to $900bn during the boom from 2000 and 2008, doubling in real terms. It has since levelled off, reaching $950bn last year. The returns have been meagre. Not a single large oil project has come on stream at a break-even cost below $80 a barrel for almost three years. A study by Carbon Tracker said companies are committing $1.1 trillion over the next decade to projects requiring prices above $95 to make money. Some of the Arctic and deepwater projects have a break-even cost near $120. "The oil majors like Shell are having to replace cheap legacy reserves with new barrels from much more difficult places," said Mark Lewis from Kepler Cheuvreux. The companies have been hit very hard, because their capital expenses have remained close to a trillion dollars a year, and now Brent crude oil is below $75 a barrel. This is not an argument in favor of a looming era of cheap oil. There will have to be some major technological breakthrough to stop the upward movement of oil prices over the long haul. What we're seeing, therefore, has to do with the world's economy. There is no place to store the oil, other than in the ground. Saudi Arabia has announced that it will not cut back on production. There is no way that the shale oil companies can afford to cut back on production. It has bills to pay. This is a heavily indebted industry, and it needs $100 oil to be profitable, meaning a positive return on investment. It is now facing $72 oil. The oil industry is highly leveraged. Once the price goes against the highly leveraged industry, the losses are substantial. How bad is it? This bad. Junk-bond debt in the US energy sector has tripled to $210 billion since 2008, comprising about 17% per cent of the $1.3 trillion high-yield market, up from only 4% a decade ago. All that financing has helped US shale flood the global market over the last couple of years, reaching 4 million barrels a day in 2014, and causing the sharp downturn in oil prices. Here's the catch: The drop in prices will make it tougher for energy companies to pay off their newly minted junk bonds. The FT [Financial Times] reported last week that a third of energy debt bonds are classified as distressed, meaning there is a high likelihood that will have to be restructured. Some investors in the riskiest forms of energy-related junk have seen their returns hammered to roughly zero. There has been way too much hype about the long-term potential of America's shale oil bonanza. Today, it is unprofitable at the margin. These projects are going to be turning more red ink than oil as the world's economy moves closer to recession. At the margin, the following price will not stop existing production. Once the oil is flowing, it is not going to cost $80 a barrel to keep it flowing. But new projects are going to be abandoned, unless the industry is willing to commit resources on long-term basis, despite the fact that oil prices have fallen below the price that makes shale oil development profitable. Idling a well, from a purely technical viewpoint, is relatively easy. But it gets complicated when companies have to factor in the financing structure and tens of thousands of land leases, each carrying different obligations and time frames, said Morrison. "Every exploration and production company is doing a detailed review of their leases and rationalizing their portfolio as we speak," Morrison said. In some cases, selling the land lease might be the answer, he said. Most oil companies were "in denial and are unprepared to endure a prolonged period of low oil prices," said Fadel Gheit, analyst with Oppenheimer, in a note. "They will have to adjust to the low prices ... by slashing budgets, improving capital efficiency, and selling marginal assets." Most will have to borrow to pay their dividends, he said. http://www.marketwatch.com/story/for-oil-companies-its-survival-of-the-fittest-2014-12-01 We are now hearing estimates that oil is going to go to $30 a barrel. If it does, the world economy will be in a recession at least as bad as 2008, and it may be worse. I don't think this is going to happen over the next year. I think the United States economy is not heading for recession, even though Japan is in recession, Europe is heading into recession, and China is slowing down. But there is nothing that says that oil cannot go below $40 again, just as it did in 2009. It depends upon the world economy. Right now, we are facing nothing like 2008. Central banks are ready to inflate. The United States economy is moving upward at close to 4% per annum, which is a lot. Interest rates are low. The Federal Reserve is no longer pumping in new money. These low interest rates are not a function of Federal Reserve inflation now. I have been saying this for several years. I don't think oil is going to $30. I also don't think that we are on the verge of any major increase in oil reserves or a major increase in oil production.