Saturday, January 17, 2015

Oil Prices and You: Winners and Losers

Although I happen to know a few people working in the financial industry who are peeved about the fall in oil and gasoline prices, I am delighted about the drop. My weekly commuting costs have been cut in half. That's more money to pay down debts, build savings, increase emergency funds, invest, assist relatives or perform any number of other Shady approved initiatives which are of much higher utility to me than spending $15-25 on gasoline every day from Sunday through Thursday. The drop in gas prices has a similar impact to a tax cut or pay raise. For people who drive 200 miles/week or more it's a virtual godsend. I am amused that the conspiracy theorists who come out to blame the Trilateral commission, the oil companies or THEM when oil and gasoline prices are high are nowhere to be found when prices are low. But there is no such thing as a free lunch. These low prices hurt producers. There are some very real winners and losers. I don't much care about the losers but it is worth thinking about because low prices may have bad results down the road. The reason that prices are low is the interaction of supply and demand. Higher oil prices gave US and other producers greater incentive to seek oil through fracking and new drilling, thus increasing supply worldwide. Domestic oil production doubled over the past six to seven years. The US is currently producing about 9.1 million barrels of crude each dayThere is a ban on US oil exports but the greater supply still indirectly reduced the global prices. It did this via the mechanism of US production crowding out foreign imports which had to seek new markets. The fact that much of the world is still mired in a slowdown or very weak expansion also caused demand to drop. 

So increasing supply combined with weak demand means that oil prices fell to levels not seen since 2009. Now usually under such circumstances the largest oil producing and exporting countries, many of whom are part of the OPEC cartel, would have a sitdown and arrange for everyone to cut production proportionately in order to boost prices to what they feel are reasonable levels. Don Corleone would give his protection in the east and there would be the peace. So far these reasonable steps haven't happened.


One of the reasons that production hasn't been cut is that Saudi Arabia, who holds the largest oil reserves and the most ability to withstand lower prices for long periods of time, is playing chicken with North American and Russian oil producers. Saudi Arabia would like nothing more than to take US energy independence and fracking off the table completely. And if they can harm their Iranian rivals while doing so and punish a few other OPEC members with reputations for cheating then so much the better. Many of the Gulf Arab states feel the same way. So Saudi Arabia and its supporters won't countenance cuts in production. In fact they have had the cheek to suggest that the US cut production. The US is not upset to see Russia have budget issues at a time when US sanctions are starting to bite. All of this means that countries like Russia, Iran, Nigeria, Venezuela among others are in deep trouble. Their budgets and internal income transfers are based on oil prices remaining within a certain range, say $70-100/barrel. Oil that remains at $47/barrel, which is the current price, could cripple their economies. There are some obvious political repercussions here. For example some of the funding from the Gulf states to ISIS could decline or dry up completely. Governments which purchase internal loyalty or stability via high oil prices could destabilize. Other losers could include North American oil producers who only expanded or entered their business because their forecasts predicted high oil prices for the foreseeable future. Obviously no one knows what the future holds. It may take more time for the ill effects to be felt. But if oil prices stay low we will see increasing and ongoing employment losses in such states as North Dakota, Texas, Louisiana and Oklahoma, throughout 2015 and perhaps even into 2016. At that point production will have dropped enough for prices to recover somewhat.

But it's not just people directly involved in the oil and gasoline business who may be facing economic or political problems from lower oil prices. When gas prices drop as much as they have done, consumers tend to lose interest in electric cars, hybrids or super efficient smaller vehicles and start to purchase more full size vehicles, particularly SUVs and pickups. The auto companies like this because they make thousands of dollars more profit per unit on the larger models. However the auto companies also have CAFE standards to meet. It is more difficult for them to do this selling larger vehicles. In general lower energy costs for fossil fuels don't align with decreased carbon production and pollution. There may well be more friction between certain government mandates and market realities. It's ironic that the end to fracking and drilling in pristine areas, something that is high on the agenda of many environmentalists may well occur because of market signals as opposed to social activism or new laws. And although by some lights, now would be the perfect time to increase the gas tax, there probably isn't much political support for that move.

So in any event, enjoy the lower prices while they last. I know I will. But keep in mind that lower prices are causing other people some hardships. We're all connected on some level. And there ain't no such thing as a free lunch.

How have the lower gasoline prices impacted you?

How much longer do you think these prices can last?

If you're saving money, what are you doing with it?

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