While
Americans were stuffing their faces with poultry Thursday, global oil
markets were in chaos. And the implications are far-reaching.
The price of oil was down more than 9.9 percent Friday afternoon after the Organization of the Petroleum Exporting Countries decided it would not cut back production significantly in the months ahead.
In
other words, even amid a sluggish global economy and a boom in oil
production in the United States, oil-producing countries from Saudi
Arabia to Nigeria to Venezuela are going to keep pumping rather than
pull back on output in hopes of pumping prices back up.
The
latest decline pushes oil prices in the United States under $70 a
barrel; the prices were more than $100 for almost all of July. And the
latest OPEC move (or non-move, as it were) suggests that it isn’t going to reverse course anytime soon.
The reporting out of Vienna,
where OPEC met, points to the cartel’s playing a long-term game in
which it tries to obliterate some of its American competition by letting
prices fall in the hope that some American producers go bankrupt.
Indeed,
the falling price of oil looks likely to be one of the dominant forces
shaping the global economy in 2015. Here is an early guide to the
winners and losers. The list is hardly exhaustive — though perhaps no
list would be, given the unpredictable ripples caused by swings in the
price of the world’s most economically important commodity.
Winner: Global consumers.
Anybody who drives a car or flies on airplanes is a winner, as lower
oil prices are already translating into lower prices for gasoline and
jet fuel. Lower transportation costs will also give manufacturers and
retailers less urgency to raise prices, as their costs fall.
This
is, in effect, a global supply shock, the reverse of what happened with
energy in the 1970s (or, to a smaller degree, the mid-2000s) when
petroleum shortages and embargoes led to a sharp rise in prices. It may
not last forever, but for now consumers in the United States and beyond
will be winners.
Loser: American oil producers. One
of the big open questions is just how many of the small, independent
producers in the American heartland have cost structures that make them
viable with oil prices in the $60s rather than the $100s. Many have
relied on borrowed money, and bankruptcies are possible. But because the
companies tend to be privately held (their financial details not
publicly released), analysts are doing guesswork in projecting how
severe the pain will be.
Loser: Oil-producing state economies. As
the American economy has struggled to recover in the last few years,
the exceptions have been oil-rich states like Texas and North Dakota,
which have enjoyed low unemployment and strong real estate markets.
But is the “Texas Economic Miracle”
just an artifact of high energy prices and improving technologies to
extract petroleum from the ground? Or is Texas’ low-tax, low-regulation
approach really the recipe for economic success? Seeing how the Texas
economy fares now that prices are slumping will be a test.
Loser: Vladimir Putin.
Russia’s economy is already facing its sharpest challenges in years, as
Western sanctions imposed after Russian aggression toward Ukraine crimp
the nation’s ability to be integrated in the global economy. Russia is a
major energy producer, and the falling price of oil compounds the challenge facing its president, Vladimir Putin.
Winner and Loser: Central bankers. Anybody
who has fretted that years of money-printing by global central banks
will create out-of-control inflation has some egg on his or her face
right now. Plummeting prices for energy and other commodities are
dragging down inflation to levels that are, if anything, too low.
The
falling commodity prices are actually making these authorities’ jobs
harder. The overwhelming urgency across the advanced world — in the
eurozone, the United States and Japan — has been to try to get inflation
higher, to reach the 2 percent annual target central banks in all three
places have set.
In
the short run, central banks tend to look through big swings in
commodity prices, viewing them as one-time events rather than permanent
shifts in the rate of price increases. But to the degree those one-time
shifts change peoples’ expectations about future inflation, and lead
people to doubt the credibility of the central banks’ promises to keep
inflation at 2 percent, it is a problem. That’s particularly true when
inflation expectations are already below where the likes of Mario
Draghi, Janet Yellen and Haruhiko Kuroda would prefer.
Potential Loser: The environment.
As a general rule, the cheaper fossil fuels become, the more
challenging it will be for cleaner forms of energy like solar and wind
power to be competitive on price. That said, the picture is a bit more
complicated with this particular sell-off. Solar and wind power are
sources for electricity, whereas fluctuations in oil prices most
directly affect the price of transportation fuels like gasoline and jet
fuel.
Unless or until more Americans use electric cars, they are largely separate markets, so there’s no reason
that cheaper oil should cause a major reduction in investment in
renewables. But to the degree cheaper oil means people drive more miles
and take more airplane flights, the falling prices will mean more carbon
emissions.
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