What is the "right" price of oil? Obviously, it is the price the market is willing to pay. That is a function of supply and demand. Simple enough - it is how markets normally function. Also, according to the normal function of a market, the price will come down. That is what happens to most commodities, they get less expensive with time.
It's the law of the market. Costs of producing a commodity will come down as a function of improvements in technology, procedures and competition in the marketplace.
How often have we heard it? Oil, like any other commodity, must get less expensive with time. Certainly the industry is making progress in its efforts to reduce the costs of extracting and distributing it, particularly from frontier environments like deep waters, remote locations and tricky reservoirs. And such progress is critical.
Then there are the prospects of very low cost production in the oil-rich Middle East, particularly if the international oil companies are allowed back on that scene. Low-cost Middle East oil, it is claimed, will make higher cost oil from frontier areas noncompetitive. That again is the law of the market.
But it's not so simple - basically because the oil market is being manipulated. That is if you call it manipulation when supply of a commodity is being curtailed to levels below the industry's theoretical technical production capacity. That happens in all industries. Limiting output to match demand is nothing new or revolutionary.
So much for supply and demand. The additional factor is cost. Does the price of oil reflect the cost of producing it? That depends entirely on the definition of cost.
The cost of oil does not let itself be calculated in exactly the same way as for most other commodities. It is not limited to the physical costs of getting it out of the ground, because oil revenue is very often what entire national economies are built on. In such cases the cost of oil is basically equivalent to the costs of running a country.
So what is the right price of oil? It is still what the market is willing to pay. And it is still a function of supply and demand.
But beyond that, never expect the price of oil to behave in accordance with further traditional commodity market laws. It will not get lower as a function of time and technology. The price of oil may well come down as a function of oversupply in the market, but not because of being a commodity.
And the low cost of producing oil in the Middle East will not totally undermine the economies of producing crude from frontier environments. While the industry is successfully making efforts to reduce the costs of extracting hydrocarbons from frontier environments, only governments can make such production uneconomic.
Besides, oil is still a finite resource. So the question as to what the right price of such a commodity is looks set to remain unanswered.