image: Sometimes things may look logical, yet just not add up.
With most of you getting used to gas prices we haven’t seen since the 1990s, it may seem counter-intuitive to suggest that low oil prices are not necessarily good for the global economy. Instead of oil being a study in free market dynamics, the situation has turned open market theory on its head. In our new connected global economy we’ve seen many examples where being down is a good thing and being up is not always a competitive advantage.
It’s in this Escher painting we call a global economy that low oil prices are not only bad but can lead to a global economic catastrophe that makes the collapse of 2008 look like recess at your kid’s daycare. Right now it’s not clear how world oil markets will find their way through the current low price crisis, and experts are now warning, for the second time this year, about the possibility of oil prices under $40 a barrel.
Cuts in Exploration
Even with the switch to solar, wind and other alternative energy sources, we’re going to need oil for a long time to come. Instead of pumping it out of the ground like there’s no tomorrow, we should be carefully rationing our supply of that finite resource to insure future generations can meet their energy needs. Beyond the tree-huggy aspect, a hard-nosed open market advocate would recognize that when prices decline, production should decline.
Instead we’re pumping oil out of the ground at record levels, with U.S. domestic production up three percent just since 2014. U.S. refineries are running at over ninety percent capacity. In the meantime, oil companies are scaling back exploration and development.
Depressed Economic Activity
A depression in the energy sector is showing up as a drag on growth in the global economy. Oil producing countries, like Brazil and Venezuela, are seeing their economies implode. Sidelining entire countries, which also includes Russia, is a drag on the global economy. As we may have observed, it also increases global tensions.
True Oil Prices Not Reflected at the Pump
If you’re thinking that the decline in oil prices is at least softened by lower gas prices, guess again. The price of gasoline only dimly reflects the price of oil. U.S. refineries are running at near capacity because oil companies are siphoning billions of dollars in profit out of your pocket off the difference between low oil prices and the current cost of gasoline. Low oil prices don’t automatically translate into lower fuel costs for you, but they do translate into more profit for Shell, Exxon and BP.
Middle East Instability
We all know that calm in the Middle East is a fragile commodity, even when the economy is purring along. A drop in oil prices, without a corresponding drop in production, means oil-producing nations, many of which are in the Middle East, are engaged in a race to the bottom. Saudi Arabia is looking at another $87 billion dollar budget shortfall this year after being $98 billion short last year. The Saudis have been selling bonds on the world market to make ends meet. Stability in Saudi Arabia is pretty fragile on a good day, so now we’re looking at one of the most highly armed nations in the world becoming increasingly poor which, over there, translates into increasingly unstable. With Saudi Arabia and Iran slugging it out for market share in the global oil market, neither one can blink on production numbers. That’s why OPEC refuses to cut production, despite low prices. All it would take is a spark to set Saudi Arabia and Iran off on each other in a war that would certainly make oil production facilities targets on both sides.
So, while Americans no longer dread pulling up to the gas pump, low oil prices continue to rile the global economy in increasingly unstable ways. We’re neglecting exploration to serve future energy needs while burning through a finite resource. We’re also looking at the shaky stability of well-armed Middle Eastern countries constantly on the verge of taking at shot at one another. None of this can well.