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Page added on January 14, 2015
The Unintended Consequences of Cheap Oil
Cheaper oil is good for the economy — it’s basically the equivalent of a tax cut. Unless it’s bad for the economy, which can be the case if falling prices spur deflation and hurt countries and companies that depend on oil exports. Whether the impact is good, bad, or a little of both, will depend on how long prices stay low.
If cheap oil is the result of a drop in demand (from an ailing Chinese economy, for example), prices will rise when the economy picks up. If lower prices stem from increased supply (from the shale boom, say), then cheap oil is here for at least a while. Two things are certain: There’s still a finite amount of oil in the world, and the economy needs oil to function. That suggests oil prices will increase someday, although no one is sure whether that will happen as soon as the spring or as far off as the 2050s.
Unless something really is different this time. Those are dangerous words, and it’s always safer to assume that history does, in fact, repeat itself. There is a chance, though, that the drop in oil prices could inspire a change in energy policy, in which case there may be lasting consequences.
Many economists support increased taxes on oil, largely because oil is necessary and scarce, and excessive use of fossil fuels harms the environment. Among rich countries, America’s fuel taxes are the lowest. Many developed countries, often oil-producing ones, actually subsidize fuel. But burning through oil today poses costs in the future, and low taxes and subsidies also diminish the incentives to discover greener, more sustainable alternatives.
Lower oil prices give governments the chance to increase fuel taxes (or cut subsidies) without incurring immediate harm to the economy. Indonesia, Malaysia, and India are cutting their fuel subsidies. The World Bank is encouraging other countries to do the same. It argues that fuel subsidies create distortions that mainly benefit middle-income households and the money is better spent on infrastructure projects. Larry Summers called on America to use this moment to increase carbon taxes. Congress is considering the first fuel tax increase since 1993.
The risk is that we still don’t know how long oil prices will last and what exactly is driving the drop. Oil prices in particular bounce around on the whims of the market. Increasing taxes would mean that even if this is a temporary blip, today’s oil market will set the tone for years to come. Suppose, for example, China cuts its oil subsidy. When oil prices rise again, Chinese consumers will face higher prices. In response, they ought to use less oil, which would leave more for everyone else. It also would give a comparative advantage to residents of countries that don’t increase taxes.
Higher fuel taxes (or cutting subsidies) makes economic sense, and this is the politically opportune time, if there ever was one, to achieve this. But setting long-term policy in response to volatile oil prices can create unintended consequences. Five years from now, some countries will face much lower prices. Others will be paying more. That may alter global trade and development ways we can’t predict today.
12 Comments on "The Unintended Consequences of Cheap Oil"
Plantagenet on Wed, 14th Jan 2015 9:33 pm
Just about all the high wage jobs created in the US over the last 6 years have been in the oil sector. Take that away and you’ve got burger flipping and government jobs
GregT on Wed, 14th Jan 2015 9:57 pm
You forgot unemployment Plant, which will effect both burger flipping and government jobs as well.
Apneaman on Wed, 14th Jan 2015 9:58 pm
It used to be that oil was the fuel of the economy, not THE economy. Most of us in the wealthiest countries have barley begun to experience the unintended consequences of our addiction. I guess it depends where you live.
New contaminants found in oil and gas wastewater
“Duke University scientists have discovered high levels of two potentially hazardous contaminants, ammonium and iodide, in wastewater being discharged or spilled into streams and rivers from oil and gas operations in Pennsylvania and West Virginia”.
http://phys.org/news/2015-01-contaminants-oil-gas-wastewater.html
peakyeast on Wed, 14th Jan 2015 10:28 pm
How interesting…
The Danish media has also touted these days that NOW is the time to cut all subsidies for oil – that they should use this unexpected low prices to do it as fast as possible so that people wont notice.
I suppose this means that the price of oil will have more difficulty as rising again since people wont be able to afford it.
Makati1 on Wed, 14th Jan 2015 11:39 pm
Interesting that the Ps uses ~400,000 barrels of oil per day VS the US 18,000,000 plus per day. The Ps has 1/3 the population of the US yet most here lead good, healthy, happy lives. And yes, gas here is now about $4/gal. Down from the average $5 the last few years.
FYI: The Pope is visiting and all banking, government and even the US Embassy is closed down. Over 300 flights were canceled to close the air space for his incoming and outgoing flights. Bars near the sites he will visit are closed. Schools, etc. are all closed. Can you imagine that happening in the US? But the Ps are about 85% Catholic. ^_^
Davy on Thu, 15th Jan 2015 6:24 am
http://en.wikipedia.org/wiki/International_rankings_of_the_Philippines
All you need to know about the Philippines is this part of the above report which points to carrying capacity:
Environment
World Risk Index 2013: ranked 170 out of 172
Perk Earl on Thu, 15th Jan 2015 7:12 pm
Looks like their pouring mercury in that photo.
Makati1 on Thu, 15th Jan 2015 7:21 pm
And the CIA is an unbiased source, Davy? LMAO!
I live here. I don’t give a damn what some Western BS is dumped into the internet. I see what it is, not read about it. And my intelligence is equal, or superior, to the composers of these ‘statistics’. I, along with 200,000+ other Americans, prefer to live here over the USSA. That should say something about the country NOT included in some government sponsored statistical report.
Perk Earl on Thu, 15th Jan 2015 8:29 pm
I know this is anecdotal, but I can’t quite figure something out. I drove into the SF bay area today to do some business and the traffic was extremely light. In fact, I drove right down into the East Bay, Berkeley on hwy 80 at 65mph. No slow and go traffic?!
I then headed over the Richmond bridge and through San Rafael and it was very light traffic. Drove north to Santa Rosa, clean shot all the way, filled up with 16 gallons at 2.29 a gallon for total of $36.something. Was so cheap it seemed like I was stealing the stuff. Then drove home.
Clear traffic all day long. Not one time was there any slow and go. I thought with these prices the roads would be jam packed. Went to three businesses and only Home Depot was there more customers than just me and I got rung up immediately without waiting. Hmm, was that the same SF bay area I’ve known all these years???
bobinget on Fri, 16th Jan 2015 8:23 am
Oilfield services giant Schlumberger plans to cut 9,000 jobs as the global collapse in crude oil prices crimps production in 2015 and perhaps even longer.
The cuts — nearly 8% of Schlumberger’s 120,000 workers, were announced Thursday “to better align with anticipated activity levels for 2015,” the company said.
With production surging and waning growth, the world is awash with oil. That’s led to a collapse in prices that’s taken benchmark crude price down more than 50% since last June. Thursday, West Texas Intermediate fell 4.6% to $46.22 a barrel, while Brent crude slipped 2% to $47.67. Yet many forecasters say crude isn’t close to bottoming.
“In this uncertain environment, we continue to focus on what we can control,” said CEO Paal Kibsgaard. “We have already taken a number of actions to restructure and resize our organization that have led us to record a number of charges in the fourth quarter. We are convinced that performance must now be driven by an accelerated change in the way we work through our transformation program.”
The layoffs come despite a relatively solid fourth-quarter earnings report in which the Houston-based Schlumberger increased revenue 6% to $12.6 billion and boosted earnings 11% to $1.94 billion. Schlumberger is also boosting its stock dividend 25%.
Houston-based energy explorer Apache Corp. began laying off about 5% of its workers earlier this week.
bobinget on Fri, 16th Jan 2015 8:26 am
Peak Earl,
Why not check BART ridership? Idid.
http://www.bart.gov/about/reports/ridership
Perk Earl on Fri, 16th Jan 2015 9:00 pm
“Why not check BART ridership? Idid.”
Thanks for the suggestion. I’ve taken Bart when going to Raider games w/friends but from where we are up north of Calistoga and with what I was transporting (500 lbs. of polyeurathane molds, with fiberglass shells) there’s only one way to get the job done – by truck.