In refusing to cut production, one central bank of oil (Saudi Arabia) followed a script written by Paul Volcker 36 years earlier. Volcker became head of the US central bank in August 1978 when inflation in the US was out of control. Oil today is in straits similar to those of the US economy in the late 1970s. The managers of the "central banks of oil," which include key producing countries and consuming nations that own large strategic stocks (especially the US and Japan), should be concentrating on oil prices and the rate of oil price increases or decreases, just as Descalzi suggests. However, all have ignored this responsibility for the last 10 years. This "dereliction of duty" on the part of oil producers and consuming nations allowed crude prices to rise to excessively high levels. As a result, an irrational exuberance grew in the oil industry, fueling larger and larger capital expenditures on gigantic projects to produce oil and, at the same time, prompting investment in expensive technology developments aimed at eliminating oil use. Investors in both camps received an additional boost from the quantitative easing advanced by central banks after the 2009 crisis.
To his credit, Saudi Arabia's Ali Naimi, the obvious head of the Saudi "central bank of oil," spotted the warning signals. At an Opec conference in late December 2014 in Dubai, he noted the increasingly aggressive pressures aimed at curbing oil consumption. In a quote reported by Petroleum Intelligence Weekly, he was plainly thinking of such programs adopted in the US, Europe and now China. "There are many things happening in the energy sphere — technology on the one hand and efficient [sic] on the other, there are politics. All of these are good for humanity, but they will definably be a threat to oil demand in the future. My question to the panel — is there a black swan that we don't know about which will come by 2050 and we will have no demand?"
Naimi also made this observation: "I attend all the climate change discussions, and I get the sense that people want to get rid of coal, oil, and gas." He added that a cap on global warming of 1.5°C to 2°C would mean "good-bye oil." One can imagine Paul Volcker making a similar comment regarding the consequences of not addressing inflation in 1980.
Key oil producers, then, have taken steps similar to those a prudent central banker might take were he or she concerned that the economic situation was getting out of control. In the current circumstances, three of the key "central banks of oil" realized that the irrational exuberance of the market participants threatened to create an excessive oil supply even as the largest consuming nations were working aggressively to "get rid of coal, oil, and gas." Their anxiety likely increased when China and the US agreed to take further steps to address global warming. No supercomputer was needed for Saudi officials to see a quickly shrinking market on the horizon. The action they took was logical because their cost to produce oil is lower than costs for the rest of the world's oil producers. By refusing to cut output, they will force high-cost producers such as Canada to choose between absorbing large losses and shutting down expensive projects. Many new developments will be shuttered as well. These nations and firms might experience the worst pain, but the consequences of lower prices will be felt by everyone in the energy industry. It will take years, if not decades, for the full impact of the price decline to be felt, just as it took decades for the full effects of Volcker's achievements to become apparent.