Chapter 8 : When Oil Prices Fall

Hyun-joo noona gave a brief explanation.

If financial assets are represented by stocks and bonds, then the counterparts of real assets are oil and gold.

Before the financial crisis hit, oil prices were nearing $150 per barrel. However, after the crisis, economic growth slowed, leading to a decrease in demand and a drop in prices.

What ignited this decline was the development of shale gas and shale oil in the United States.

The fact that gas and oil were contained in shale rock had been known for a long time.

However, due to cost and technical issues, drilling had not been possible until then.

But with oil prices consistently above $100 per barrel and new technologies being developed, drilling finally became feasible.

American companies rushed to break the shale rock and extract the gas and oil within.

The quantity was staggering.

It could be called a shale revolution without exaggeration.

"Do you know what the three major crude oils in the world are?"

I learned this during my world economy class.

"Brent oil from the North Sea, Dubai oil from the Middle East, and West Texas oil."

For reference, our country mainly imports Dubai oil among these.

Hyun-joo noona nodded with a smile.

"That's right. As you can see, the United States is originally an oil-producing country. However, the amount produced was far less than domestic demand, so despite being an oil-producing nation, it maintained its position as the largest importer. But the shale revolution completely changed that situation."

The amount of shale gas and oil produced by the U.S. was enough to turn it from the world's largest oil-importing country into an oil-exporting one.

Naturally, oil-producing countries were in an uproar.

Oil demand is inelastic. An increase in price doesn't significantly decrease consumption, nor does a decrease in price lead to a surge in demand.

As a result, price formation had been supply-driven for a long time.

OPEC was essentially an internationally recognized cartel. Whenever they colluded, oil prices fluctuated, leading to the first and second oil shocks.

However, the U.S. emerged as a new supplier outside of that cartel.

The once rosy forecasts of oil prices exceeding $200 per barrel vanished, and prices kept falling.

Demand was fixed anyway.

To raise prices, supply needed to be reduced. OPEC member countries hurriedly held multiple meetings to agree on production cuts, but the results were always failures.

"The interests of oil-producing countries are too intricately intertwined."

The biggest disadvantage of shale oil is that its production cost is high.

Production costs are estimated to be around $45 per barrel, so if oil prices fall below $50 per barrel, it has been said that over half of the companies could go bankrupt.

"Countries like Venezuela, which are on the brink of starvation, might actively support production cuts since a further drop in oil prices could lead to their bankruptcy. However, countries like Saudi Arabia have plenty of money saved up, so they're inclined to hold out without production cuts for the time being. If low prices continue, shale companies will also suffer."

"What do you think the outcome of this meeting will be?.

"I'll bet they'll fail to reach an agreement. They're barely keeping the price at $60 per barrel right now, and if this time also ends in failure, it'll fall below $50. All the big players seem to be betting in that direction; just this week, WTI (West Texas Intermediate) prices dropped by over 8%."

While prices rising excessively is a problem, prices falling excessively is also an issue. In the current situation, the drop in oil prices has had a negative impact on the economy.

"What if an agreement is reached?"

"If an agreement is made, oil prices will skyrocket, and the market will rejoice, but... the possibility is extremely low."

"Still, I think there will be an agreement this time."

Hyun-joo noona looked at me with a puzzled expression.

"Why do you think that?"

I realized I had spoken without thinking.

I stammered a bit.

"Well, I just thought it would be nice if that happened."

Hyun-joo noona gave a bitter smile.

"It would be nice, but hope and prediction are different things."

As the conversation ended, Hyun-joo noona's phone buzzed again.

Bzz!

Checking the message, she stood up.

"Looks like preparations are done. I have to get going for work. Let's meet again next time. Jin-ho, take good care of him."

"Yes, don't worry."

Tak-gyu grumbled.

"I'm the one who takes care of Jin-ho. You don't know him that well."

______________________________________

We got back into the car to head home.

While Taek-gyu was driving, I continued to think about what I had seen earlier.

What does OPEC's production cut agreement really mean?

"..."

It surely means that OPEC is agreeing to cut production, right?

If an agreement is reached, oil prices will skyrocket. It's common knowledge, even without Hyun-joo noona saying it.

At that moment, a thought suddenly popped into my head.

Then what if I buy crude oil in advance?

If this is truly foresight and what I saw was correct, just buying oil in advance could lead to a significant profit, right?

Oh! I feel like I just had a really good idea.

I calmly thought it over.

I predicted the mortar explosion and the Mountain Hill bankruptcy. According to induction, I should also be right about this OPEC production cut agreement. (I'll think about the shortcomings of induction later.)

The problem is the investment capital.

I had given my mother 100 million won after renting a house, so the only money I have left is the 275 million won remaining in my account and the 740 million won in Taek-gyu's account.

Should I invest all of this?

Just then, Tak-gyu asked.

"Did you see something when you were talking to noona earlier?"

"Hmm?"

"You saw something, right? What was it? What did you see?".

"..."

The kid is annoyingly perceptive.

Wait a minute. I only have around 1 billion won, but he has more than ten times that amount.

I looked at Tak-gyu and asked.

"Do you have any thoughts on buying crude oil?"

Tak-gyu looked confused.

"Crude oil? You want me to buy oil? I just filled up my gas tank."

"No, I'm not saying you should fill up your tank..."

I explained what I saw and the thought I just had.

Hearing my story, Tak-kyyu was taken aback.

"So you foresaw the OPEC production cut agreement, and if that agreement is made, oil prices will rise, so you want to buy it in advance?"

"Exactly."

Fortunately, he understood easily.

"But where are you going to store the oil? Are you going to stack barrels in your house?"

"..."

It seems you don't completely understand.

We arrived at Tak-gyu's studio apartment in Yeoksam-dong.

As soon as Tak-gyu entered the house, he cleared the dishes from his desk to one side and turned on his computer. He opened a web browser and immediately searched for WTI.

The U.S. oil production is barely enough to meet its domestic demand. Therefore, even if transactions occur, there are no actual exports.

However, due to the developed financial market in the U.S., it plays a role as a price indicator determining international oil prices.

As Hyun-joo noona said, WTI was barely holding at $60 per barrel. Specifically, it was $60.48.

"It's dropped a lot."

Crude oil is not only used to fill up cars but is also utilized across various industries.

Therefore, rising oil prices have a significant impact on producer prices.

When my father was running a factory, he struggled with oil prices exceeding $100 per barrel. Yet here we are, hitting the bottom in just a few years.

The shale oil phenomenon is indeed remarkable.

Tak-gyu logged into his Golden Gate account. Even after sending me 500 million won, he still had a balance of $11,932,000 left. About $673,000 of that is my share.

"WTI? Where do you buy that?"

"On the New York Mercantile Exchange."

Tak-gyu seemed excited about something.

"How much do you plan to buy?"

Not knowing how it would turn out, maybe I should start with just half.

"$300,000."

"Then let's buy mine too."

"How much are you getting?"

"Just about $10 million."

"In won?"

"No, in dollars."

I was flabbergasted.

"How is that even reasonable? Are you out of your mind?"

"Then how about $5 million?"

Is he having trouble controlling himself now that he has money?

"This isn't certain, you know."

"You predicted it, right? Then it should go well."

"What if it doesn't?"

"Okay. $3 million. I can't go lower than that."

"...Do as you like."

The market was predicting a failure of the production cut meeting.

That prediction was already reflected, and oil prices had dropped significantly. Even if the cut failed, additional declines wouldn't be that large.

If I'm wrong, I can just sell it at a loss.

I logged into Tak-gyu's account and purchased WTI.

While saying $330,000 is a lot, it's an amount ordinary people can't even imagine. With trembling hands, I clicked the purchase button.

"What do we do now?"

"We wait for the OPEC meeting to finish."