Merry Christmas from Saudi Claus?
Gasoline prices across American have plummeted recently, plunging right through what I've come to call the "Gingrich threshold." (Former House Speaker Newt Gingrich promised during his 2012 campaign for the Republican presidential nomination that his policies would drop pump prices to $2.50 a gallon.) Now, even without the bumptious Pennsylvania native in the White House, some places are seeing prices 20 percent below that. I've seen some pro-Democratic sites add this to the list of achievements by President Obama, but that's reaching. The most we can say is that Obama's energy policies, such as they are, haven't prevented prices from dropping.
But we're not about politics or personalities here. We want to know: Why did this happen? Is this a good thing? And should I now buy a house in a subdivision in the cornfields?
Oil prices have been volatile since the turn of the millennium, which mostly have been due to fluctuations in supply. (An exception was the drop in prices in late 2008, when the economic slowdown caused a drop in demand.) Economic development in Asia, particularly in China and India, has increased demand, and exerted a steady upward push on prices. Once a certain price was reached, it became economical for companies to extract oil from difficult places, like shale deposits in America and the Canadian tar sands. The increased supply could exert a steady downward push on prices.
That didn't answer the question, did it? The forces I've described in the previous paragraph could explain a cycle of mild ups and downs in gasoline prices, but is not as convincing an explanation for why oil prices have fallen by 50 percent in the last six months. So, what's going on? Commentary runs to two explanations: [a] manipulation by the Saudis, who continue to control the largest amount of traditional oil reserves, and have some motives to drive supplies up and prices down; or [b] it's really markets i.e. the supply increase from American and Canadian production has generated unstoppable momentum. That one also requires Saudi involvement, however, because they could have counteracted the price drop by decreasing their own production, which they did not. They did try that during the 2008 downturn, only to have other producers make up the difference, which is probably why they're not doing it now. They're wealthy enough for the price hit they're taking not to be painful, while other oil-producing countries who are not their friends--like Iran and Russia--are hurting.
Many commentators feel American oil production is likely to be resilient, although costs of extraction costs are much higher here than in Saudi Arabia. Eric Smith of Tulane University's Energy Institute told NPR's Marketplace that American producers could keep going with prices where they are now, in the mid 50's per barrel. “You’d probably go down to $30 before somebody shuts in a well. They might not drill a new one. But they wouldn’t stop producing the old one until the price got below that cost.” The Economist notes the financial vulnerability of American oil firms, but suggests that low prices would only pause shale production. "There is always a new set of investors" said one of their sources, ready when price incentives to produce return, possibly with better technology.
So, definitely good for drivers, companies that have energy-intensive production or high transportation costs, and consumers that buy their products. Mixed news for American oil producers (and their investors), and bad for the autocratic rulers of Iran, Russia and Venezuela, as well as their client states like Cuba. Sounds like a win so far! But what are the impacts of lower gasoline prices on our common life? Here there's some good news, too: Lower energy prices stimulate the economy, which might give our four-year-old recovery the kick in the pants it needs to do some serious job creation at last. Jobs that pay well? Well, maybe.
On the other hand... until recently high energy prices were working together with changes in how people want to live, shaky government finances, and developing concerns with pollution and climate change to produce a society-wide rethink of our car-centered economy. The combination has produced, for example, the changes in American living arrangements documented by Leigh Gallagher in The End of the Suburbs. If we decide all of a sudden that cheap gasoline--relatively speaking, of course, because it was under a dollar a gallon as recently as 2001--is here to stay, those other issues aren't going to go away. But the compulsion to address them might.
If we decide all of a sudden that gasoline is going to be cheap, and then the price bounces back up--analyst John Michael Greer calls this current phase a "fracking bubble"--things might get ugly around here.
Historical data on oil prices from TradingCharts.com: http://futures.tradingcharts.com/chart/CO/18
Leigh Gallagher, The End of the Suburbs: Where the American Dream is Moving (New York: Portfolio/Penguin, 2013)
John Michael Greer, "Deja Vu All Over Again," The Archdruid Report, 17 December 2014, http://thearchdruidreport.blogspot.com/2014/12/deja-vu-all-over-again.html
Mitchell Hartman, "Oil Prices Scrape Bottom of the Barrel," Marketplace, 18 December 2014, http://www.marketplace.org/topics/economy/crude-economy/oil-prices-scrape-bottom-barrel
"In a Bind," Economist, 6 December 2014, 81-82
Joe Nocera, "Shale and the Falling Price of Oil," New York Times, 23 December 2014, http://www.nytimes.com/2014/12/23/opinion/joe-nocera-shale-and-the-falling-price-of-oil.html?partner=rssnyt&emc=rss&_r=0