There is a trade war in oil and fossil fuels. It has four causes I can identify:
1. The slowdown in economic growth worldwide, especially China, EU and India. Even the shocks in supply coming from wars and boycotts against Syria and Iran, and collapse in Libya, have not counteracted the price plunge from slack in demand.
2. Competition from new sources of oil and natural gas arising from hydraulic fracturing technology (fracking) is weakening OPEC price leverage.
3. Smaller, but significant, moves to alternative non-carbon-based energy sources: Solar, wind, and others degraded fossil fuel market share.
4. Geopolitical effort by U.S. and UK oil-backed interests to punish Putin and Russia, with attractive (to them) destructive side effects in Venezuela (and thus Cuba), Nigeria, Iran, Syria, and other resource-income dependent U.S. states such as West Virginia, North Dakota and Wyoming; not to mention negating recent cost improvements in renewable technologies which make them more competitive in some state energy markets.
It is difficult to know precisely how to weight some of these factors. For example, anti-Russian geopolitical moves may be more important than competition from alternative energy sources. However, of the four, number one is clearly the most worrisome, and the one that most concerned scholars on energy panels and workshops at the American Economics Association national meeting this past weekend in Boston. The global Great Recession is not over. Indeed, it shows signs of renewed weakness in many areas.
Here are some short term effects:
1. More disposable income for most consumers, meaning most Americans. Easier winter heating costs. Lower production costs for manufacturers and other high-energy consumers. Tougher time for migratory workers following the shale drilling boom across the country, and chasing work in the only middle-income growth industry in recent times for workers outside of the high-tech and financial services industries.
2. Declining stock prices as oil and energy assets are revalued. More oil was produced than sold in the U.S. for the past four consecutive quarters. The rate of production growth nonetheless is still positive, and still ahead of demand, though slowing down recently. The dollar will be weaker if decline persists. A weaker dollar improves exports but puts the U.S. financial system on weaker ground as capital moves to other currencies. There will be deflationary pressures.
3. Big shakeout of smaller or over-indebted operators in the shale (fracking) industry which can only break even at $70 a barrel, according to industry data. The Federal government’s Energy Information site (EIA) puts Brent crude currently at under $60 a barrel. Jobs are declining in all power-related fields except solar generation. The latter is still a small sector, however, relative to oil, natural gas, nuclear and electrical generation-related employment. Sustained low oil prices will reduce the renewables share of energy markets – a result that fuels numerous conspiracy theories populated with climate change-denying corporate feudalist villains.
4. The price of energy is an important foundational index of economic growth. There should be some uptick in both income and growth. As long as cheap energy is maintained, it will have a multiplier effect potentially as strong as lowering interest rates, or raising public investment in job creation. At the same time, it will act as a drag on energy conservation and efficiency regulation, and environmental protection efforts aimed at reducing fossil fuel consumption. Maybe Hummers and an aged “Ahhnald” will come back! Eeek!
Protection against volatility
For the longer run, it is important to remember that higher standards of living require widening rivers of energy to sustain. According to the EIA, even under optimistic political and economic assumptions about efforts to improve conservation and efficiency per capita, and expand reliance on renewable resources, fossil fuels will remain a strategic and growing energy source, providing over half of energy consumption for decades to come. Further, fossil fuel markets are inherently volatile, subject to seasonal spikes and other shocks in supply and demand due to external factors: geology, weather, war, depression, etc. The volatility has an immediate impact on industry, agriculture and consumer pocketbooks. This is one reason for strong incentives to invest in “hedge” funds sold as a “protection” against volatility in very energy-sensitive sectors.
Do the giant energy corporations and their billionaire owners – now enshrined by our Supreme Court as “super-persons” – manipulate this volatility, along with their ability to consume politicians virtually at will, to punish (or reward) us all, according to their private pleasure? Hard not to be suspicious. Is there any thought that the energy sector will relinquish the grip it has maintained on foreign and energy policy for half a century or more before resorting to every vile or coercive weapon at their disposal?
A better “protection” against volatility would be a direct public and worker-controlled “hedge, risk-bearing” fund with a direct voice in the leadership of any too-big-too-fail enterprise. That would have to be preceded by a radical “personhood-ectomy” of all corporations, and their reconstitution as entities entitled to limited liability in exchange for a duty to pursue a public good as well as private profit.
Happy New Year! More socialism – the only hedge against capitalism!
Photo: Making a heating oil delivery to a home in Jenner Crossroads, Pa. Lower oil prices for many U.S. residents translate to lower winter heating costs. (AP Photo/Tribune-Democrat, John Rucosky, File)
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