Yes, We Should Be Worried About Falling Oil Prices

Planning a road trip this summer? Thanks to newly cheap gas, you’re not the only one. Fracking operations in North Dakota and Texas have made the U.S. the world’s largest oil producer seemingly overnight. At the same time, Middle Eastern oilmen continue to produce at a high rate, creating the saturated market responsible for the low cost of crude.

Is Faith in Fracking Ill-Founded?

America’s new oil operations have provided much-needed relief at the pumps, but not without consequences. Without the income from American buyers, smaller oil-producing nations are suffering. In Venezuela, where 95 percent of export revenue comes from oil production, people are struggling to buy food and the threat of economic collapse looms.

In the U.S., efforts to transition away from fossil fuels are ongoing, but without the constant reminder of gas prices, sales of inefficient trucks and SUVs are on the rise. Experts project that fracking efforts can prop up cheap prices for another three years before the U.S. will be forced to purchase foreign oil once again. Those who can afford it have already started investing in oil, anticipating its impending price hike.

The Big Picture

More frightening than the threat of higher fuel costs in the states, however, is what the low price of oil says about the global economy. Oil production may be up, but oil consumption is also down around the world. Economists fear this is an indicator of deflationary depression.

If they’re right, we have a situation in which the global populace is struggling to save money. When this happens, less money is fed back into national economies. This results in governments being unable to build infrastructure like roads and buildings, creating low demand for commodities like oil.

The best way to right this deflationary depression is to create more high-wage jobs and debt.

The Answer Is Always…Debt?

Yes, you read that right, debt is a good thing. At the moment, U.S. interest rates are low, so low that in fact that they can’t get much lower. Low interest rates make it easy for people to borrow money, which in turn stimulates the economy and creates demand for more products.

The scenario to avoid, then, is the opposite of falling interest. Rising interest occurs when lenders aren’t confident that loans will be paid off. When workers don’t earn enough to create the economic demand required to fuel a consumer economy — for example, because they work for an energy company that can’t pay them due to the low price of commodities — it can set off a deadly chain reaction.

If the price of oil drops below the cost of production — which it has in many countries — economic contraction can occur. Venezuela’s economy is on track to contract more than eight percent in 2016. The effect is crippling for individual countries, but on a global scale it could be catastrophic.

How can we avoid what seems inevitable? New technologies are allowing us to get more out of each drop of oil, so perhaps the answer is to raise prices and sustain production at a slower pace. While it’s plausible, sadly this scenario won’t be realized in time to save places like Venezuela.

The die is cast. All we can hope for now is the toughness to endure the consequences.

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