We will not be so presumptuous to suggest that the worldwide plunge in oil prices will be the equivalent in magnitude of the mortgage-driven financial collapse of 2008 that shook the finance industry, but we might. Actually, it might be greater. The effects of the drop in oil prices, down from about $90 a barrel last summer to something just under $50 dollars, is creating extraordinary economic ripples – no, waves – around the world.
In the U.S., auto owners are leaving the gas station with a whole lot more money in their pocket. With a 13 gallon fill-up costing about $30 rather than $45 or $50, that difference was part of the reason that Christmas retail sales were up significantly. That is easy to be thankful for.
In other parts of the world, countries have seized the opportunity to add taxes to the reduced price of gas to fund government projects, or they have reduced or eliminated the subsidies they have long applied to make gasoline more affordable.
In the U.S., exploration companies are selectively letting employees go. Long sales price commitments are protecting some jobs, and companies do not want to lose employees’ expertise if the price slump turns out to be short-lived, but there is certainly a very real hesitancy to add to the number of producing wells. And while natural gas and oil prices are not entirely linked, natural-gas prices are down, as well. Even with a cash cushion wisely built in previous years by La Plata County government, voters will soon decide whether to raise taxes to cover an inevitable shortfall; expect that same ballot question in many other locales.
Legislatures in the few states that have benefited from fracking techniques are quickly tightening their belts.
Switch the focus to overseas, and it is many of the OPEC countries that are affected: Government revenues in Venezuela, for example, are plummeting. The Saudis, which have the lowest cost oil, continue to pump as before. That volume protects their market share and puts pressure on much higher cost oil from U.S. fields where fracking is occurring.
Then there is Russia, where the effects of the economic sanctions applied by a few countries to push back against Russia’s desire to forcibly split off at least a portion of the Ukraine have been tripled in intensity by the drop in oil prices. Russia faces significant economic strangulation.
Most worrisome to some economists is the threat of deflation brought on by low energy prices. Lower energy prices reduce the cost of goods, creating in consumers the belief that prices will be lower in the future. As a result, they reduce their shopping, and the economy expands more slowly or not at all.
Deflation, the few times it has happened in some countries for other reasons, such as in Japan, has proved to be very difficult to correct.
The U.S. economy is in much better shape than other major countries, and the credit for that goes partially to the increased government spending beginning in 2008 and to the large amount of money the Federal Reserve put into the system as it purchased bonds to keep interest rates low. Controversial as that was, the U.S. is in far better economic shape today than it would have been without the bond buying.
Hang on. The year 2008 began a rough ride, and we could experience something very similar that involves much more of the world with the low oil prices.