1hundredsixty8

Gasoline prices have been dropping dramatically these past few months. You would think that is a good thing. After all, the drop in energy prices provides a boost to the economy: Money not spent of fuel is spent on other things; people drive more when gas is less expensive, so all types of travel-related businesses benefit. Some portion of the public is aware that declining prices at the gas pump are a result of a precipitous drop in the price of crude oil on the global market. Some believe that this is due primarily to the re-emergence of the United States as a major oil producer, fueled (sorry- I could not resist) by the oil boom in North Dakota and Texas.

“It’s the market at work”, we are told, “the Law of Supply and Demand. We’re producing more here in the States, so we’re driving down the price.” And, don’t forget to throw in “energy independence” as an additional benefit.

Of course, to paraphrase the old saw, “what goes down must go up’.

The actual workings of the global oil market are more complex than the average person comprehends. Begin with the fact that oil is a fungible commodity, meaning it can be sold anywhere in the world regardless of where it came out of the ground. Despite presently producing more oil than any other country, the US remains both an importer and exporter in the global market. Historically, prices on that market have been subject to manipulation, especially by OPEC. The market is also affected by external factors such as government regulation and the actions of commodity traders. The present situation arose from the untimely intersection of supply growing while demand slackened: Not only has US production increased, but so has that of other countries.* Simultaneously, the slowing of some of the world’s economies (Europe, China) has reduced demand. Eventually, as David Cay Johnston points out, prices must stabilize. It is a certainty they will begin to increase again in the future; the only question is how long the consumer will enjoy the benefits of the current situation.

The Downside

Saudi Arabia, the largest producer in the OPEC cartel, has decided to tough it out and not reduce production as a means of bringing supply into balance with demand, OPEC’s usual approach to supporting higher crude prices. The Saudis, with substantial cash reserves, can weather the storm of low prices and maintain market share. This does not sit well with some of their OPEC partners, such as Venezuela, Algeria and Nigeria, whose economies are inextricably tied to the petroleum market.

Particularly hard hit is Mother Russia. Some reports state the budget of the Russian government depends on a crude oil price of about $100 a barrel. Prices slipping below $70 have put a crimp in Comrade Putin’s plans to modernize the Russian military. Coupled with the economic sanctions imposed by the US and its European allies in retaliation for Russian destabilization of Ukraine, the falling price of crude has left Russia teetering on the brink of recession. The ruble, the Russian currency, has been flirting with complete collapse the last few weeks. A consequence is that, by having Vlad over a barrel (literally), the chances of unpredictable aggressive acts by Russia would seem to be greater.

Perhaps, of more direct concern, is that that lowered costs of energy are related to a global economic slowdown. (The US is the notable exception, with our economy showing steady growth and job creation.) As Max Ehrenfreund pointed out in Wonkblog in November:

“The unfortunate truth is that low prices for gasoline are a symptom of a sickly global economy. It isn't just gas prices that are falling… Metals such as copper, silver and platinum are [inexpensive], too, and so are crops like corn, soybeans and wheat.

“If prices continue to fall, the [global] economy could be in real danger, because there won't be much central banks can do to encourage spending with interest rates already at or near zero in most of the world. Lower prices might be good in themselves, but it's what they reveal about the way things are headed that's cause for concern.”

As crude prices drop, it has also become evident that the re-vitalized US oil industry is taking a hit. Much of the increased production is the result of fracking, a method that allows producers to get to deposits formally unreachable by traditional drilling methods. Fracking comes with higher production costs, and the lower prices have already caused some smaller operations to curtail or completely cease production.

Over the long haul, the real cost of low prices is not the impact on our wallets today. Inexpensive gas means more miles driven and that, in turn, means more pollution. It is likely, too, that, in the face of less-costly fossil fuels, alternative and sustainable energy sources will be considered too expensive to garner the government subsidies required for development.

That Tower of Power song from 1975 says it all:

“Only So Much Oil in the Ground”

S. Kupka, E. Castillo

There's only so much oil in the ground
Sooner or later there won't be much around
Tell that to your kids while you driving downtown
That there's only so much oil on the ground

Can't cut loose without that juice
Can't cut loose without that juice
If we keep on like we doing things for sure
Will not be cool - It's a fact
We just ain't got sufficient fuel

There's only so much oil in the ground
Sooner or later there won't be none around
Alternate sources of power must be found
Cause there's only so much oil in the ground

There's only so much oil in the earth
It's a fact of life - for what it's worth
Something every little girl and boy should know since birth
That there's only so much oil in the earth

There's no excuse for our abuse
No excuse for our abuse
We just assume that we will not
Exceed the oil supply
But soon enough the world will watch the wells run dry

We just ain't got sufficient fuel
We just ain't got sufficient fuel

*For example, Libya announced this past October that its crude oil output would soon reach one million barrels a day. Iraq, despite the war with ISIS that has curtailed output in the country’s north, is moving to increase production in its southern oil fields with the goal of achieving over 8 million barrels a day by the year 2020.