Why We Should Care About $2.00 Gas
If you counted on keeping your GPA above the price of gas this semester, we have good news for you.
Oil prices dropped below the $2.00 line nationwide in February for the first time in 7 years, with barrels of crude oil briefly dipping below $30, a 70% drop in price since the peak in June 2014. For students, this means cheaper airline tickets, more affordable road trips, and lower prices at the store. So, what caused this crash in prices, and why should we care?
Since the 1960, OPEC (Organization of the Petroleum Exporting Countries) has remained a heavyweight in the realm of oil price fixing, with member countries constituting 40% of global production and 73% of the world’s proven oil reserves. Yet in 2015, OPEC is struggling to maintain control of oil prices, as a result of fracking increasing production in non-OPEC countries, lowered global demand for oil, and the backfiring of an OPEC price war dedicated to eliminating US shale oil producers.
To most Americans, the low price of oil is heralded as an economic windfall that holds numerous benefits. In his State of the Union address, President Barack Obama has joked that “Gas under two bucks a gallon ain’t bad,” and sure enough, according to a Bureau of Labor and Statistics report, US consumers are saving up to $700 per year from cheaper gas which is being used to drive consumer spending. The same effects can be seen in oil-importing countries of Europe and Asia, where lower prices across the board are stimulating greater demand for goods and services.
Yet, as we cheer on the savings from cheaper gas, there may be many economic consequences that result. US energy producers have invested a heavy portion of their assets into creating oil extraction and refinement plants. With energy earnings declining as much as 76% across the S&P 500 energy sector, companies worldwide are unable to continue investment into unprofitable ventures, canceling $380 billion in proposed projects according to Wood Mackenzie, an energy consultancy. As a result, the age of Michael Steele’s “Drill, baby, drill” has evidently come to an end, in which there are virtually no wells that are profitable to drill in the United States. Furthermore, the decline in gas price instigates a ripple effect across the entire energy sector, causing alternative energy sources to become price inefficient compared to cheap gas, cutting funding and postponing research and development of these technologies.
Although drops in oil prices have traditionally driven economic growth, the current state of oil may prove to shift this paradigm. Despite lowering prices for consumers, the lower price of oil has failed to show anything but signs of a weakening economy, including slowing output growth, falling inflation expectations, declining corporate earnings, and a marked 10% drop in the S&P 500 this year. In response to this situation, Andrew T. Levin, Dartmouth economics professor and former adviser to Janet Yellen, has warned that “the Fed has to take seriously the possibility that we could enter into another economic downturn, and it urgently needs to make contingency plans for that scenario.”
Yet worst of all, the rapid crashes in prices may cause instability of governments that may lead to geopolitical struggle in the near future. As of yet, the Russian ruble, which has its value closely tied to the price of oil, has lost over half its value compared to the dollar, reminiscent of the oil price drop in the late 80’s that crashed the Soviet economy and contributed to the dissolution of the Soviet Union.
If the situation is this bad for Russia, where oil exports account for just 50% of the national budget, you can only imagine the situation in 10 of the 14 OPEC countries that depend on oil for over 85% of their export revenue. As political supports in many of these countries are closely tied to the economic benefits of a stable oil operation, signs of recession may create a toxic economic environment that results in weak currencies, trade deficits, soaring food prices, and rising poverty, threatening the stability of government establishments and potentially serving as the catalyst for global conflict.
So what does this all mean? Bottom line: if you aren’t studying petroleum engineering or plan to work in the oil fields, sit back, enjoy the lower prices, and splurge on that Spring Break trip you always wanted. Yet, with gas prices stagnating at a low $30-40 per barrel price range, this economic stalemate is not something that will blow over quickly. The next time you pull up at the pump, enjoy your silver lining of savings, but be wary of the economic cloud following closely behind.