Who Is Cheap Oil Really Benefiting?

Who Is Cheap Oil Really Benefiting? | oil-gas-petrol-451x300 | Economy Economy & Business

Despite enormous levels of public support for alternative energies, we’re still living in a world where changes in oil price create ripples that can be felt at the furthest reaches of civilization. And if the last few months are any indication, a great deal more turmoil may still lie ahead.

The truth is this: Even the agencies whose job it is to predict these kinds of seismic changes have been scratching their heads over oil’s tumultuous price fluctuations. The International Energy Agency (IEA), for example, admits freely that predicting the movements of the oil market over the next five years is incredibly difficult, if not impossible, to do with any degree of accuracy.

The bottom line, though, is simple: The price of crude oil has hit a proverbial rock bottom. As of this writing, the cost per barrel is $34, which is the lowest it’s been in more than ten years.

This, of course, brings us to several important questions.

What Does This Mean for Consumers and Businesses?

Opinions appear to vary somewhat when it comes to the short-term effect spiraling crude prices will have on the average consumer.

Whereas 60% of consumers say they cut back on other expenses when gas prices are high, the opposite tends to hold true when gas prices plummet. Indeed, the last few months have seen a big boost to SUV sales, since they’re now more affordable to keep fueled. It’s the latest example of American shortsightedness.

Nevertheless, those who don’t splurge on a new gas hog may see average annual savings of $1,000 or more. Unfortunately, only the most budget-savvy American households may actually take advantage of this windfall. Forty percent of consumers spend their “gas savings” on simple necessities rather than saving them for a rainy day. That’s according to a Bankrate survey of 1,000 Americans.

In other words, low oil prices have not, at least so far, translated into increased spending or more widespread confidence in America’s economy. Apart from booming SUV sales, most Americans appear to remain suspicious about how long oil prices will be this low. If we were a little more confident that this isn’t a temporary anomaly, we might expect an across-the-board improvement in economic activity. Instead, spending remains mostly flat.

What Does This Mean For the Economy As a Whole?

But what of the American economy as a whole? It turns out falling crude prices haven’t been that much help there, either. Economists usually expect low oil prices to deliver a widespread boon to national economies, but this time we’re not quite seeing that kind of benefit. In reality, energy companies have scaled back their investments and expansions, laid off workers, and ultimately reported anemic gains.

As it turns out, the economists over at JPMorgan Chase could not have been more wrong if they’d tried. As oil prices fell, they predicted a .7 percent improvement in economic growth. Instead, we’ve seen a .3 percent decrease in economic growth. This is not at all what was supposed to happen.

What Role Do Governments Play in Bringing Oil Prices Down?

It’s no secret that the nations most closely tied to OPEC rely on high oil prices to “make bank,” as it were. And that’s why it’s so surprising that the various OPEC countries weren’t able to halt the glut in oil prices. In times past, all they had to do was cut off the supply, and prices would spike back to a more “agreeable” level. But that’s not what’s happening this time around.

It turns out that the United States may have had more to do with the situation than previously believed. In 2014, for example, the US produced more oil than it had at any point in the last 25 years — more, in fact, than Saudi Arabia. In other words, we flooded the market. Soon after, crude prices began their precipitous drop.

And then there was the government’s decision to sell off its oil stockpiles while prices were falling — a decision that every oil investor will tell you is a bad idea. The truth is, the US government did this as much to flood the market as it did to justify a short-term spending spree called for by the recent budget deal. It was, in other words, a unique opportunity — and they took it.

There are other factors at work, naturally — such as the unrepentant animosity between Saudi Arabia and Iran, but the big picture makes both the western and eastern hemispheres complicit in the current situation.

The bottom line is that the once-predictable future of oil prices and consumption has been violently upended. If even the IEA is scratching its head trying to predict the next five years, then there’s not much point in trying to prognosticate too hard in a blog post.

For the time being, spend those gas savings wisely. In fact, let’s borrow a turn of phrase from the alcoholic beverages industry: Enjoy Responsibly.

Daniel Faris is a graduate of the Writers Institute at Susquehanna University and a current resident of Harrisburg, PA. When he’s not blogging about politics, you can find his alter ego discussing progressive music over at New Music Friday.

[mailpoet_form id="1"]

About The Author

Daniel Faris is a graduate of the Writers Institute at Susquehanna University and a current resident of Harrisburg, PA. When he’s not blogging about politics at Only Slightly Biased, you can find his alter ego discussing progressive music over at New Music Friday.

Related posts