CHEAP OIL: GOOD NEWS, OR BAD?

By Paul M. Lewis

Anyone who drives a gas-guzzling car these days is probably happier than they were just a few short months ago. In that space of time, the price of oil has dropped 29%. Brent crude, which serves as the global benchmark for oil, was at $82 a barrel as of mid October, the lowest in four years. This compares to almost $116 per barrel back in June. According to the U.S. Energy Information Administration, the average the cost of a gallon of gasoline has also gone down from an average of $3.51 to $3.39 in 2013 and 2014 respectively, and will undoubtedly slip below the three dollar mark next year, to an average of $2.94 per gallon. In some places, it already has.

The question is: who is this good and bad news for? Consumers are among the most obvious winners. Who doesn’t rejoice when it takes twenty to thirty dollars less to fill up your tank? With the possible exception of the wealthiest one percent, most of us count our dollars, and when we don’t have to spend as much to get to work, or to run errands, or to take the kids to soccer practice, then there’s that much more for other everyday needs. The same can be said, by the way, for the cost of heating oil, which has also decreased by almost the same trajectory. Especially for those living in colder climes, this all amounts to substantial savings, and there are a lot of people who are breathing a sigh of relief as a result.

Manufacturers, too, are happy about the current state of affairs. One way or another, it takes energy to produce anything, and although the cost of electricity has not been substantially affected by the volatility in oil prices, other costs certainly have, particularly that of shipping. Airlines are also dancing the cheap-oil jig since, after salaries, jet fuel amounts to their biggest outlay of capital. Maybe this will also result in the cancellation of some of those annoying “energy surcharges” airlines have for some time now been adding on to the cost of tickets; yet another bonus for consumers, and ultimately for businesses that have to send people around the country, or the world, to conduct affairs.

Surprisingly, yet another winner is the stock market, at least for those stocks that do not include oil. As referenced above, manufacturers and airlines, and even healthcare providers, all benefit from lower energy costs. Consequently, the overall value of these companies and corporations has concomitantly risen, and their stocks along with them. People’s investments are, therefore, worth more, and those retirees who live off their savings may be starting to feel less of a belt-tightening.

Even environmentalists may have some reason to rejoice, although not too much. Projects such as the XL pipeline are no longer looking as fiscally advantageous as they once did. If OPEC is selling its product that much cheaper these days, there is no longer such a compelling need – nor is there economic justification – for companies to spend what it takes to extract oil from the tar sands of Alberta and ship it a couple of thousand miles across the United States for processing

This all brings us to the basic reason why there is currently an oil glut, driving down the cost of the product. What happened is that OPEC, at the insistence of 800 pound gorilla Saudi Arabia, decided to keep on pumping lots of oil, almost literally, you might say, flooding the market. The obvious result is that this drives the cost per gallon down, which at first may appear counterintuitive as to how companies normally ought to work. However, it soon becomes clear that OPEC (aka Saudi Arabia) has decided to endure short-term pain for the explicit purpose of long-term gain. Lower energy prices, as noted above, make it far less profitable for newer technologies, such as extracting oil from tar sands, to compete in the open market. The hope is to drive these new sources of oil out of business, so as then to eventually raise prices again, once these companies are no longer viable competitors. After all, this is how capitalism works: do whatever you can to undercut your competitors and then, once they are no longer able to compete, raise your own prices. It all makes good economic sense.

But new energy companies, and in the short-term OPEC members, will not be the only losers in this global energy game of chicken. There are others as well. Governments of all sizes and political persuasions will suffer. Canada, for one, will lose a great deal of money. It’s been estimated that the province of Alberta alone will miss out on as much as 1.2 billion dollars annually because of the price of cheap oil. And that’s only if the price drops below $80 a barrel next year. What will happen if, as many analysts predict, it drops to as low as $65 a barrel? Saskatchewan currently has a budget based on projected revenue coming in with oil set at $100 a barrel. Other Canadian provinces will suffer, as well. And what of poor Vladimir Putin? The ruble has already lost some 40% of its value, and not just because of U.S. and EU sanctions. The plunging cost of oil has contributed majorly to this drop. Everyone knows that much of Putin’s popularity has been based on the fact that the Russian economy has been awash in oil money for years now. What will happen to pension payments, education, food subsidies, infrastructure, even the servicing of debt, to say nothing of the wrath of the oligarchs who have helped prop up his repressive and oppressive government, when people begin to really feel the pinch? Some economists predict deep recession for the Russian economy in 2015. Mexico, too, has reason to be concerned, to say nothing of countries like Nigeria and Venezuela.

But what of yet longer term losers? And by that, I mean all of us. It’s clear that one of the reasons why companies have been interested in investing in clean energy alternatives these past few years is because of the rising cost of oil. If the price of that commodity is now falling, what impetus do companies have to make such an investment? Companies are not philanthropic institutions. They exist for one purpose, and for one purpose only: to make money for themselves and their investors. If they aren’t making money doing a particular thing, they’d better stop doing it, or else they will fail. In addition, cheap oil spurs developing countries to invest in exactly the same kinds of dirty energy policies that richer countries have for years been engaging in.

The result is that all of us risk being washed away in that flood of oil. There are no easy answers. The way the system is set up, if the enormous wealth tied up in energy companies were magically to drop to zero tomorrow, the world would surely be plunged into a recession that would make the last one look like a Sunday afternoon picnic in the park. But if we don’t do something to lessen the impact of our dependence on Big Oil, we will continue down the same road we have long been traveling, to perhaps an even more catastrophic end.

Winners and losers there always will be, no matter what the game. That seems to be how humans are made. But is there a way for us to mitigate the losses, and maximize the gains, not for the few, but for everyone? The immediate issue of the glut of oil in the market is, of course, merely temporary, and a human created one at that. The bigger question by far is this: just how long will the planet be able to sustain the economic growth model of world development? There’s an answer that no one seems to be able to predict this, and one that ought to concern everybody who cares about the world we are living in, or the kind we are leaving for our children.

One thought on “CHEAP OIL: GOOD NEWS, OR BAD?

  1. A former insider in the Citizens’ Climate Lobby (CCL) reported to a recent CCL meeting in Washington D.C. that the Saudis are also attempting to do serious damage to the booming fracking industry — extracting natural gas by means of deep and oblique hydrolic fracturing and drilling, using massive quantities of water and chemicals. He said that they will bankrupt a few fracking companies and then return to higher cost oil. Your article, Paul, points out that the Saudis have a lot more reasons to continue flooding the market with cheap oil than just busting fracking. Is this strategy a lot more than merely smart corporate maneuvering? Is it possibly planned and timed to grab a whole lot more global power than money alone can bring? If they decide to play their vast oil card all the way to its extreme conclusion, it appears that the world may be destabilized in more ways than just economically. Meanwhile, many major climatologists are now saying that we have passed the point of having any hope of keeping global warming under 2 degrees Celsius. Ultimately, profound ecological destabilization will be the bull in the Earth’s increasingly fragile China shop, as you point out. Excellent post, Paul! – Kevin

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