To a significant degree, the recent drop in gasoline prices can be tied Saudi Arabia’s desire to screw over the Iranians (and the Russians) without having to resort to open military conflict. By refusing to go along with a cut in OPEC’s production of oil, the Saudis are contributing to a major loss of revenue for their adversaries.
Iran’s foreign policy is very expensive, and they will soon have to make difficult choices that may entail scaling back their regional commitments. Meanwhile, Bashar al-Assad’s main patron, Russia, has seen the value of the ruble plummet in recent weeks. Putin just had to abandon a planned pipeline through Bulgaria and Serbia that would have undercut Ukraine’s power and revenues.
Cheaper gas prices should work as a stimulus to the U.S. economy by freeing up money that consumers can spend in other areas. At least for now, the low prices should not cause a contraction in the domestic production market, so this is like a big middle class tax cut.
Of course, we’re just serfs observing the Big Boys playing the Great Mineral Extraction Game, and this is but one piece of a very complicated and troubling global picture. With the threat from Islamic State, Iran can no longer be considered as an unambiguous enemy. Lower gas prices encourage more gas usage. More energy independence is good, but it can also create dependence on the industry as well as producing more domestic political power for the energy industries.
But it can be plausibly argued that at least in this one narrow area, the policy is having some positive effects.
Low prices will eventually burst the fracking bubble in the US and extinguish the profitability of tar sands oil from Canada.
But the worst effect will be slowing of conversion to renewables that now must reach a lower parity cost with fossil fuels unless new regulation ups the prices of fossil fuels.
And the pressure on our putative “enemies” has the cost of confirming the neo-con view that the US can still muscle its way around in the world instead of dealing with reasonable diplomacy. So Iran, Syria, and relations with Russia will remain intractable because this sort of power play makes the opposing parties dig in politically even though it costs them economically.
Seeing a upside is a remarkable Pollyanna sort of attitude.
Because it is further evidence of the national security march of folly.
One upside in a better world would be the opportunity to raise the gas tax to a reasonable level. The reason nobody’s talking about that is the reason there’s no upside.
Because I’m afraid the slowdown in fracking and tar sands brought on by macroeconomic forces is just a temporary delay. The good news will be if Europe continues to resist fracking for more long-term reasons.
True. Given that global demand is certain to keep rising, it’s only a matter of time before fracking and tar sands become cost-effective again.
I reject the idea that the Saudi’s are aiming at Iran and Russia. This is what they may be telling our state Department, but it’s pretty clear that it is aimed at US energy independence. They are killing solar, wind, shale and tar with equal impunity. Both Left and Right should step up to support a $50 per barrel oil import tariff. Then we can go back to fighting about fracking vs renewables. As long as the Saudis control our energy supply, we will be involved in these endless Middle East wars.
is not by and large used to generate electricity in the United States. Their move does nothing to effect the economic viability of solar or wind: whose main competitors are coal and natural gas. The primary effect here in the US is twofold:
On what do you base your argument, though?
Is it really true that lower gas prices means that renewables have to reach a lower parity cost? The main competition for renewables fuels is coal and natural gas, both of which are unaffected except tangentially by OPEC’s moves on oil prices. I guess it’s true that there’s some effect there, but it seems minor to me.
it makes it more likely the Iranians will come to a deal over their nukes. Which is why, I think, the Saudi’s are doing this.
Putin, a former KGB officer, is well aware of the role low oil prices had in the collapse of the Soviet Union.
I don’t think you are close to right about any of this.
It is good news for the economy. It makes a deal with Iran more likely. It makes a deal with Russia more likely.
But most of all it is also good for everyone in the country who lives paycheck to paycheck.
It is terrible for the environment, but there are policies that can address that.
I believe you are right. But never underestimate the pig headedness of either our neo cons or their adversaries around the world to attempt to use this to their advantage. And with lower prices come more use and all that implies for the environment.
True.
On South Stream and Turkey:
○ New moves alter energy routes around Turkey
On France and President Hollande:
○ France delays delivery of Mistral warship to Russia
In the end, France will deliver the two Mistral-class BPCs (helicopter carrying and command vessel) to Russia as they are ready and taylor-made for the Russian Navy. More negatives for France …
“France, which is suffering from record-high unemployment and stagnant growth, not only loses the receipts from this sale but also that its credibility as a weapons exporter is compromised.”
○ Sanctions propel Israel, Russia to expand agriculture ties
Saudi Arabia’s low oil price at $70 will hit US shale exploration:
○ Break-even point and drilling in the biggest US shale formations
“… its credibility as a weapons exporter is compromised.”
Good. We don’t need France as a Merchant of Death.
But they’re still building LNG terminals along our coastlines, so I suspect this move is more about injuring Russia (like blocking the South Stream is) than any permanent shift in anything.
Alas, since our President was gunned down in the Oil Capital of the World in 1963….
The big downside to low oil prices: it means the economy, especially the world economy, is weak. Can Europe hit a third recession in a short six years? I’m going with yes.
The economy IS weak, but the low prices are not a reflection of that. This is classic predatory pricing.
Indeed.
Tend to think of “predatory pricing” as gouging purchasers. If OPEC’s move is not driven by economic fundamentals (and I wouldn’t so cavalierly dismiss that as you have) or a political agenda, then wouldn’t it be monopolistic pricing?
Monopolistic predators.
Predatory pricing is when a deep pockets actor cuts prices below cost to drive everyone else out of the market leaving them with a monopoly.
http://www.investopedia.com/terms/p/predatory-pricing.asp
https://www.accc.gov.au/business/anti-competitive-behaviour/predatory-pricing
Wolf Richter: Saudi Arabia declares oil war on US fracking; hits railroads, tank car makers, Canada, Russia; sinks Venezuela
Like destroying infrastructure, impoverishing people just as a power play is never a good idea if you want peace and prosperity.
Short term this is excellent news. The economy is still anemic and this is a huge boost for consumer spending. Given the refusal of Congress (or the ECB) to stimulate demand, this could be just what the global economy needs.
Long term this has some positive effects, too. Falling oil prices – whether in the ’80s or ’90s – have strongly correlated with rising democracy. Oil is a powerful resource for autocracies to bypass popular will. If autocracies lose that power to buy off the political competition, they lose their most potent non-coercive means of staying in power. I doubt this leads to the downfall of Putin, but Venezuela is an example of a country that could see more civil liberty reforms.
The downside is the environmental effect, but that’s why you have to hope that something like increased CAFE standards can replace market based fuel efficiency that we’ve seen over the past few years.
Politically and economically, falling oil prices are excellent news. Environmentally, we have to hope for good public policy, and that’s in perilously short supply.
All I know is that I’m paying more for a Gallon of Milk than a Gallon of Gas these days.
You’d think someone would be trying to get some credit for that, even its short-term.
I really don’t understand what the Saudis hope to accomplish with lower prices. They can harm Russia, Iran and the U.S. oil industry in the short term. But unless they are planning on keeping the prices low indefinitely the situation will quickly reverse once prices are raised. So maybe, just maybe they are lowering the price to ensure they maintain their monopoly. That would be a longer term impact.
In the meantime, lower prices mean people will use more of it and will likely be able to spend on other things as well. So it should help the economy to some extent, although not the oil industry or those dependent on it like the rail road or pipelines. But still a net positive for most people.
There is a chance this will encourage Iran and Russia (even ISIS) to come to the table.
The lower prices will put a premium on doing something for the environment, but given our dysfunctional congress likely not much. And that is a negative.
It’s nice to know we can get cheaper gas when the US and Saudi Arabia need to screw someone.
And yet with the tumbling of gas prices Southern Europe is scrambling for its natural gas, and the US (through Brussels) has been successful in blocking the South Stream, which further hurts Russia.
Luckily, all those LNG terminals being built along the East Coast will be able to send our fracked natgas to our friends in Europe. It’s almost as if this was all planned. Nice to know that our international goals of democracy in Ukraine (by backing a fascist coup of the intellectual descendents of the SS Nightingale Division) will make Russia’s gaslines across Ukraine undependable. Nothing says democracy like cutting off a region’s heat during winter.
Not seeing anything approaching a consensus here on this issue. Although most of us would agree that USians and the world need to burn a whole lot less oil, gas, and coal to avoid a collapse of our ecosystems. The problem is that the “free market” has no interest in reducing fossil fuel consumption.
Oil prices go down, consumption goes up. (Understand SUVs are making a comeback in US auto showrooms.) Oil prices go up, new oil sources are drilled and pumped. Recessions/depressions are a surefire way to reduce consumption and the price of oil. The 1999 oil price drop/trough was a response to the “Asian flu” that devastated so many lives and economies. But probably enticed more USians into buying that SUV (that they deserved).
A difficulty in assessing whether a significant decrease in oil prices is a good or bad thing is because historically it’s been both and OPEC sometimes is responding to economic fundamentals, sometimes uses its power for political purposes, and sometimes it’s both. (India is anticipating an economic boom with the cut in oil prices.) Yet,it’s difficult to see how the low price of oil 1985-1995 had a positive impact on the US economy. IOW it’s all a great big guessing game that we assume always works out in the long run (long run not more than a few years).
Does $70/barrel cause the financial collapse of some oil producers? US oil fracking companies and Canadian tar sands oil mining are probably the most vulnerable because the production costs are high. That $1.4 trillion in junk bonds that funded fracking operations may not look so good in the coming months.
The extra pennies it puts in the pockets of US consumers will have only a meager stimulative effect on the economy and then only for consumer and not durable goods (except those new and used SUVs that may now leave the car lots). How fast, far, and wide the price reduction flows into the US economy is also a guessing game. Major consumers are likely to have hedged their purchase price; so, the operating costs will continue to reflect that hedged price for some time. But 75% of those pennies are coming out of the pockets of US oil producers and 80% of that income reduction will hit Five US state and the Gulf of Mexico. So, will OPEC’s move hurt Russia and Iran and spare the TX and ND economies?
Stimulative effect given that healthcare, food and rent will easily absorb whatever savings are realised from lower fuel costs. In spite of our central bankers we seem to be continually eroding wealth through modest inflation.
Somebody check me on this (I am not real good at math). Gas around here is $2.80 a gallon. Not too long ago it was $3.60. So I save $.80 per gallon. I drive around 15000 miles a year and get 21 miles per gallon. So each year I need 714 gallons of gas or a savings per year of $571. (I’ll take it thank you very much.) Now if there are 125 million people doing that it is a savings of $71b a year??????? I also think there is something like 95,000 barrels per day world wide. Some math on that yields close to a trillion a year. Carry on Saudi.
Is that right? Can’t be.
Looks good to me. And ten bucks a week isn’t much stimulus. If I buy an extra pizza once a week, it’s gone.