12-9-14 – Oil Slump Brings Holiday Cheer–Almost

By John J. Metzler

UNITED NATIONS–The precipitous fall in petroleum prices has brought an unexpected holiday season bonus to oil and gasoline consumers throughout North America.  And it’s not a moment too soon that the high fuel prices of the past few years finally take a dip.  But while cheaper costs, both for private drivers and the wider trucking and transportation industry, happily align with the upcoming holidays, there’s actually a bigger story here.

Over the past few years the USA’s anemic economic growth has been hampered by excessive regulation as well as the yet unforeseen cost consequences of Obamacare.

Despite mega trillion-dollar public spending by the Obama Administration, the U.S. economy is doing only marginally better.  The better news is due not so much to the hand of government but the business cycle, which after the long dark years since the 2008 crash, has apparently turned.

Despite the Obama Administration’s cumbersome economic planning, it’s more likely that the hidden hand of market forces, as foreseen by the great Scottish economist Adam Smith, have driven an expanding American energy supply boom. There’s also a temporary falloff in demand.

Serious American domestic energy production (oil and gas) is turning the USA and Canada into a dynamo, happily far less dependent on the Middle East. This outcome presents a win-win situation.  Average U.S. gasoline prices have dropped from $3.87 in Summer to approximately $ 2.71 today and may fall another 20 cents per gallon by year’s end according to the American Automobile Association (AAA).

But the real story here besides lower prices at the pump is that a sustained fall in petroleum prices will provide a needed and unexpected boost to the American economy as a new source of suddenly disposable income becomes available.  This unexpected rebate of cheaper gasoline and heating fuel can realistically put $40-$50 in everybody’s wallet weekly,  across the board, and at a time of year when people wish and want to spend more.  Some economists predict that the spending bonus will cause an extra 0.4% rise in GDP this year.

This is a good thing for North American consumers.  Equally it is a windfall for poor developing countries who are particularly hostage to OPEC’s high oil prices.  Most countries’ economic growth is linked to global petroleum prices.   Thus for the Third world, this is a short to medium term positive situation.

Yet there are other angles to the story. Economies like Mainland China and much of the European Union experiencing a moderate slowdown, has translated into falling fuel demand.  And as mentioned, increased American domestic production is largely the reason for the price dip.  This too is certainly cyclical.

For oil producers such as Russia whose economy is overwhelmingly dependent on energy exports, the fall in the per barrel oil price can be devastating.  According to the IMF, Moscow needs an oil price of $105 per barrel to balance budgets.  Russia can weather an $80 price, but the current numbers in the $67 range will cause serious cutbacks and likely a recession according to Russian government estimates.

Now view this from a political prism.  Vladimir Putin’s Russia which has been buffeted by moderately effective Western sanctions response to Moscow’s actions in Ukraine, (which has hurt European countries more than we realize), is really over the barrel with a steep and sudden decline in the global oil price.   The Rouble, the national currency, has lost 60% of its value this year.

Though the long-suffering Russian people have an amazing capacity to endure, the fact remains what unforeseen political forces will be unleashed by a crashing energy market?  President Putin stated candidly “The times we are facing are hard and difficult.”

This reality is not unique to Russia.  Equally the oil rich Islamic Republic of Iran bases budgets on $131 per barrel and Venezuela at $118.   Again one does not have to be too creative to hypothesize that such regimes with large populations and near total oil export dependency can be rocked by serious economic and political instability.

The major OPEC Middle East producers such as Saudi Arabia and the Gulf states such as Kuwait, Qatar and the United Arab Emirates while dependent, have small populations and are moderately well insulated from the current crisis by huge foreign reserves.

So there’s finally some positive news as a dangerously tumultuous year nears its end. Still the market forces which bring this dose of good cheer are very likely to change yet again.  In the meantime, there are not many people complaining about cheaper gas prices at the pump.

*******************

John J. Metzler is a United Nations correspondent covering diplomatic and defense issues.  He is the author of Divided Dynamism The Diplomacy of Separated Nations; Germany, Korea, China (2014).

{ 1 comment… read it below or add one }

Jim Bulmer December 13, 2014 at 1:17 am

Be careful about falling oil prices. If Putin feels that Russia is being, in his view, unfairly treated by the world community, there is no telling what he might do. For example, look at the Crimea and Ukraine.

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