Monday, January 18, 2016

Oil Prices Stay Low

The price of oil has fallen to $29 and could stay low for months with Iran and the United States now rejoining the world oil market. Crude oil is the raw material for most motor fuel, and the price of gasoline in my local area has fallen to $2.039. 

There are other factors that suggest oil prices might not go up much in the near term. U.S. drivers are not boosting their driving miles nearly as much as the halving of gasoline prices in recent years would suggest. A mild winter in large parts of the United States has reduced the demand for heating fuel, and that effect is compounded by ongoing efforts to make older buildings more thermally efficient. Globally, manufacturing is increasing only slightly if at all, as consumers seem to be losing their desire for durable goods. The transition to sustainable energy sources is continuing uninterrupted, as if oil could no longer be relied upon as a source. As one high-profile example, Denmark is producing half of its electricity from wind power. Regions where government budgets depend on oil revenue are trying to pump oil faster to make up for price declines, adding more supply to an already oversupplied market. Jet fuel is never used so much as in wartime, and a global reluctance to get into large-scale war keeps demand down. At the same time, the recent shakeout in airlines has reduced the number of passenger flights.

The loss of oil revenue has had drastic effects on spending. Whole towns have shut down in North Dakota, while in Alberta, government services have been cut and will be cut again. A declining Canadian dollar is seeing far fewer Canadians going abroad for vacation. Russia has banned food imports from almost every country in the world, supposedly for political reasons, but surely in part because there isn’t enough hard currency to pay for imported food. Iran is counting on new oil revenues to help ease the grumbles of a hard-pressed working class, but may instead see its oil profits go down with the decline in oil prices. The fast-disappearing oil profits are the main reason some economists look at the world and predict a global recession in 2016.

But the loss of oil profits in some places means that energy is less of an expense elsewhere. Americans are using their fuel savings to pay off debts. Airlines will be able to continue to operate for now, with little risk of bankruptcy on the horizon. Saudi Arabia and other Middle Eastern oil countries are using the current low prices as an occasion to phase out subsidies on motor fuel, a necessary step that will make their economies more balanced and efficient in the end. Ironically, many businesses are using the money left over in their energy budgets to pay for new energy-saving measures, such as replacing low-efficiency fluorescent lights with modern, efficient lighting. The current low energy prices are helping to reduce the demand for energy in the future.