Fact: The price of crude oil has fallen by 30% since June. With the inclusion of shale oil drilling by the US oil producers; this added supply will support this...
Having several economic issues confusing many experts is great theatre. Take for instance the drop in oil. You do not hear anyone claiming the predicted this bottom and hit on all of their short positions. There are a few analysis that claim they recommended investors to hold on oil since there was going to be a small correction due to weaker demand.
LEAN SIX SIGMA TEACHING POINT: One way to understand the problem is to look at the issue from the customer. As we read the quotes from the UAE Oil Minister, we start to understand the problem. With OPEC deciding not to recalibrate their production level due to the price changes indicate a “push” than “pull” production system. This produces waste in the system, i.e. inventory is one example. For the market to return to equilibrium, this inventory will also have to be consumed which will lengthen the time for the lower price to exist. The extra time will provide investors a longer time horizon to invest in lower equity and bond prices in this industry. The UAE will continue to produce at its total production capacity regardless of the oil price since the projects were all approved.
To understand the cost of poor quality of this decision, we can calculate the number of barrels sold during this price drop. The difference in the oil price from the oil drop to the future equilibrium price level will determine the price gap. This total is the waste caused in the system for selling oil at below an equilibrium price level.
Gary Kapanowski – Lean Six Sigma Master Black Belt – Excelsior
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