As Americans reluctantly shook off the sweet fog of the holidays and headed back to work this week, many commuters continued to enjoy the unexpected gift of dramatically lower gas prices. It remains to be seen if this is a gift that will give all year long, but there's no doubt it's widely felt now. Regular unleaded gasoline is down a whopping 50 percent in some places in the last few months, with much of that drop coming just in the last few
weeks. That's not just a trend, it's a collapse. And while we anticipate a kick to the economy and celebrate what is, for all intents and purposes, a long overdue raise in pay, the question of why this happened and what it means looms in the back of our minds.
Conventional wisdom has it that OPEC, led by the Saudis, have intentionally boosted production to cut prices:
Brent crude oil fell below $50 briefly on Wednesday. Oil prices have been in a nose dive ever since the beginning of last September when oil was trading over $100 a barrel. Lower oil prices have had a significant impact on energy producers, and many energy stocks have already seen significant declines. Oil may continue to drop because of overproduction, a refusal to cut production by OPEC, and a decline in demand from major consumers like China.
Another big question is how these prices might wind and run throughout the global economy. At first glance, the latter might seem obvious: it's all good! At the risk of drizzling on this parade, there are winners and losers in any big price move. In the U.S., some newer well-paying jobs with great benefits in the energy industry could be put at risk. Overseas, the economies of non-OPEC oil-producing nations could stumble and collapse. Aside from fanning conflicts in already volatile places, a currency collapse can reach around the globe at the speed of Google and
cause meltdowns surprisingly close to home. If you're inclined to take a poll and a quick plunge into speculation on motive, follow me below the orange waterline.
On the conventional wisdom, undercutting shale and tar sands producers, it seems like overkill. Cut your prices in half now, possibly for quite a long time, because someday in the future, you fear prices might get cut by an unknown amount from alternative sources? It might slow down competitors, it might even knock some companies out of business. But some of these tar and shale producers have deep pockets, they can hedge in the futures market, and that oil isn't going away. Still, it has to be the best bet. Maybe the Saudis are saying to us, "We're your oil dealer, you can count on us, stop fooling around with these newcomers and we'll always take care of you."
Undercutting governments we or the Saudis don't like? Russia comes to mind. We can't speak for the Saudis, but does Obama strike you as the kind of six-shooting cowboy who would be on board with destabilizing a nuclear-armed Vladmir Putin and his merry band of oligarchs, the same guys who are already engaged in land-grabbing and goose-stepping? Maybe that's good for the Saudis, but it sounds like a big headache for us.
Stabilizing the dollar, keeping interest rates and inflation low? Good for everyone ,no doubt. But rates are already real low. If prices drop much further and stay that way, it could actually trigger deflation. Something we haven't seen in the U.S. in any substantial way in a long time. Since inflation is bad, deflation might sound good. But it's not; there are costs that are fixed, coupon rates on bonds or your mortgage payment, that won't go down and can't always be quickly renegotiated if the price of commodities in general go down. In a sustained deflationary environment, sooner or later wages will catch up, meaning they go down, and a lot of those payments stay the same.
And then there's the Hail Mary: Do low oil prices hurt ISIS? Because if they do, this could be perfect. ISIS passes themselves off as a devout religious group, but they govern like a ruthless criminal syndicate that would make the Mafia blush, trafficking in everything from genocide to child sex slaves. If low oil prices weakens them, reducing the skim, causing dissension up and down the ranks, it would have the added benefit of ripping off the disguise and exposing them for what they are. Consider that the Saudis, along with the Kuwaitis and everyone else in the region, have way more to fear from ISIS than they do from tar and shale producers in the U.S.
The tell on that one would be if coalition forces swooped in within a month or two with fat bribes to break off those who can be paid to go away and with ground forces backed up with air power for those who try to ride it out. This is admittedly a nice thought: if we get rid of ISIS by way of buck-fifty-a-gallon gasoline, and it was a plan between the U.S. and the Saudis all along, I think the usual wingnut suspects might lose their minds forever. It also smacks of wishful thinking.
One thing we can be sure of, no one knows where prices are going from here—and that includes the analysts you see on stock channels who claim to know. But this probably isn't a raise, it's probably more like a year-end bonus. So make the most of it while it lasts, because it never does.