BY JUSTIN SIEGEL
The present drop in oil prices is unlike one we have witnessed in modern times. Presently at the time of writing this article oil has dropped nearly 50 percent in a six month period. While most people are gladly welcoming lower oil prices and the effects it has on their daily budget, there is more to this present drop than meets the eye. Ultimately its economic impact may rival the 2008 financial crisis.
Before we go into the potential positive and negative impacts on the economy and our daily lives, let’s look into the reason as too why oil has dropped so fast.
The shale oil boom, which has largely occurred during the last four years, has made America a top player in the global oil production market. We are presently at 1970s level production, the last time America produced this much oil.
The dominating players in the oil market within OPEC are worried that increasing United States oil production is a threat to the market share they have held for nearly 30 years. At present we in the United States have surpassed Saudi Arabia in oil production, the largest OPEC member.
This large increase in shale oil production, which has occurred over a relatively small amount of time has, been heralded as the new age of American oil independence and dominance. Much of the economic recovery in the last four years has been due to the shale oil boom.
OPEC is now seeing the threat and they have a plan to keep oil supply high, which will drive the price down. We must consider what the macro effects are to the United States and the global economy.
The positive impact we see immediately for us on the east coast are a decline in transportation costs including daily driving and eventually airline and bus transportation. The cost of our travel will decrease. While certain parts of our energy bills may decrease, much of the saving will not always be passed on outside of a gas station. Most of our goods shipped by fuel intensive transport will not see much decrease, as the companies will look to take advantage and have better profit margins.
Negative impacts of low prices of the shale oil boom will show up in some locations where the boom has been ongoing. In the mid west where large shale oil projects have been funded by low interest rates and a high oil price, which at the time the boom began was around $100 a barrel.
The drop in oil prices makes many of these projects no longer economically viable. It also presents a situation that could derail the recovery we have experienced over that last four years. If the price remains below $70 for an extended period of time, we could see many oil projects go off line. This will add to unemployment and present a danger of default to these high debt exploration drilling companies that have funded their operations with over $500 billion in debt.
On the macro global level, we have already seen what some of the effects are on oil producing nations.
This is best seen in Russia where the Russian ruble has collapsed to the point banks will no longer trade it with western counterparts. The economy will enter into a recession due to the fact nearly 25 percent of government revenue and economic activity is tied to the oil sector.
Many other countries will feel a similar economic slow down. This will cause government revenue to drop and cash reserves will be used to makeup for the short falls from decreased revenue. For the cash rich countries like Saudi Arabia and Norway, they will weather the low price with little problem, while the governments of Nigeria and Iran need high oil prices to fund government related social benefits. This may be a cause for potential social unrest as governments cut back spending and that will affect the citizens that rely on such government assistance.
While oil price is at a historical low in relation to the post 2008 surge many factors will contribute to the price eventually rising as all things with a price do. For the time being low oil is a much needed boon to holiday spending and helps the average consumer. So enjoy this time in history. Looking back we might possibly at the start of a large change in how geo-political power dynamics of the west and east have been aligned for 30 years.
Justin Siegel is a self taught economist from Stony Point