If Oil Prices Drop Below $80 a Barrel . . . .

According to the consensus, only a collapse in demand for oil is capable of driving oil prices below critical levels. At that point, the expectation is that marginal producers would quite production, resulting in a drop in supplies, and a rapid rise in oil prices above the critical cutoff.

The European recession, the slowing growth in China, and the Fiscal Cliff in the United States could drive oil prices much lower.

Recent economic figures from China were mixed. Its Service PMI was above 50, but still dropped quite significantly over the last two months. Europe’s unemployment is rising as the economy slows again, and in the U.S., talk of the Fiscal Cliff is raising the level of uncertainty for markets. One might extrapolate from all of this to mean lower economic activity ahead. This would mean lower demand for energy.

What if Brent Crude Oil prices were to drop below $80? WTI Crude oil was $88.50. Brent Crude Oil was around $110 on December 4 2012. A drop in Brent prices would hurt profits for oil companies. _The Street

The short article above focuses on the effect of a price drop on small to medium-sized oil companies, and marginal producers. Certainly a number of them would be forced to halt production and new drilling if prices dropped below $80.

But quite a few producers of shale oil and oil sands would be able to ride out oil prices below $80 -- as long as prices dropped no lower than $60. A drop in prices would force even more of them to innovate more economical production methods.

But what about the effect of a serious oil price drop on Russia and a number of OPEC countries?

Many of these countries -- including Iran, Russia, and Venezuela -- have ambitious plans for regional domination through military power. To achieve these goals they will require high global oil prices. Other countries such as Saudi Arabia, Iraq, and other Gulf states, need high prices to pacify their restless populations -- and to fund global Islamic fundamentalist movements.

It is in these parts of the world -- where governments are dictatorships and free markets are not allowed to function -- where a sustained drop in oil prices would lead to serious unrest.

As mentioned above, the consensus hovers around the idea that only a drop in demand could possibly lead to a serious drop in oil prices. But if free market forces were unleashed across more of the world -- including the US, Europe, South America, MENA, Africa, and Australia -- significant new supplies would complicate the picture as well. It is only by bottling and confining markets and innovation that political entities artificially contain latent supplies. Thus the term, "political peak oil."