The plunge in oil prices — to about $66 a barrel from over $107 in late June — has many pundits wringing their hands. They have cited the risks of falling prices and social and political unrest overseas, not to mention the economic threat to the booming mid-American oil basin, running from Texas to North Dakota and Alberta.
But if history is any guide, it’s hard to see falling oil prices as anything but good news for everyone whose fortunes aren’t tied to oil, which is to say, most of the world’s population.
“Every time you get a sudden move in oil prices, people say, ‘This is it, we’re finished,’ ” said Daniel Yergin, the author of “The Quest: Energy, Security and the Remaking of the Modern World,” and vice chairman of the energy consulting firm IHS. “People seem to forget that oil is a commodity, and like other commodities, its price moves in cycles set by supply and demand.”
Although sudden price spikes seem to receive more media and political attention — Dr. Yergin noted that Teddy Roosevelt warned of the “imminent exhaustion” of oil in 1908 — oil gluts and price drops seem to happen with similar regularity. In 2008, oil went from $145 a barrel in July to $33 in mid-December, a plunge precipitated by the financial crisis and a collapse in global demand. While $33-a-barrel oil seems cheap now, in 1998 and 1986, oil dropped below $10 a barrel. That makes this latest decline the fourth precipitous fall in the last 30 years.
While circumstances are never exactly the same, and the impact of cheap oil can be difficult to isolate from other economic factors, the broad consequence in each of these instances was the same: They stimulated global economic growth. Dr. Yergin estimated that global economic output would grow this year by an additional four-tenths of a percent with oil prices at $80 a barrel. If oil stays below $80, he said, “We may revise that to five-tenths.”
“The national average for a gallon of gas is already below $3 and headed lower,” said Denton Cinquegrana, chief oil analyst for the Oil Price Information Service. “Consumers will have more money to spend, and we expect to see this extend through the winter. It may well persist into 2016.”
While it’s still too early to assess the holiday shopping season, November auto sales surged 4.6 percent from a year earlier to an annualized rate of 17.2 million vehicles. The top three sellers were pickup trucks: the Ford F-150, Chevrolet Silverado and Dodge Ram. While their fuel efficiency has improved over previous models, they’re still gas-guzzlers compared with a Toyota Prius or even a Cadillac sedan.
Apart from the benefits for consumers, previous bouts of low oil prices turned out to be great for stock prices, with the exception of the energy sector. In 1986, the Standard & Poor’s 500-stock index rose 18.67 percent in a bull run that lasted until the recession of 1991. In 1998, the index rose 25.58 percent and 21 percent the year after. And even though stocks collapsed in 2008, they staged a huge rally in 2009.
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One caveat is that cheap oil may lead to pockets of excess. A year after the 1986 plunge, in October 1987, the stock market crashed on what became known as Black Monday, though it soon recovered. The two years after the 1998 drop led to the peak of the technology bubble, which popped in March 2000. Some pundits are now warning of new asset bubbles in the making.
This year’s price decline is most nearly analogous to 1986, Dr. Yergin said. Oil price plunges in 1998 and 2008 were set off by unexpected financial crises — the failure of the hedge fund Long-Term Capital Management and the Asian debt crisis in 1998, and the collapse of Lehman Brothers in 2008 and the ensuing Great Recession. In 1986, a surge in new supplies from the North Sea and Alaska, areas beyond the influence of the Organization of the Petroleum Exporting Countries, drove down prices.
This year, the precipitating factor has been the waning of threats of disruption from Russia and the Middle East, slowing economies in Europe and Asia and, above all, a surge in production from the United States and Canada. “This time, the innovation is fracking,” said Philip Verleger, president of an energy consulting firm and former director of the Office of Energy Policy in the Treasury Department. “The sudden surge in U.S. oil production has profoundly changed the dynamics of the markets. The oil exporters have lost a third of the market they thought they’d have in 2014.”
OPEC met on Thanksgiving, but shocked markets when its members didn’t even pay lip service to the need for production cuts or price discipline. The price of oil, traded on international markets, fell about 6.5 percent that day. “Their strategy is to let prices fall and squeeze out the higher-cost producers,” Mr. Verleger said. “It’s a battle for market share.”
Low oil prices aren’t an unmitigated blessing for the United States, since it’s now the world’s largest oil producer and may soon emerge as an oil exporter. OPEC’s strategy may be to let prices fall to a point where North American shale and tar sands production cease to be economically viable. “But that’s a dangerous game,” Mr. Cinquegrana said. “The shale producers keep lowering their costs of production thanks to technology.” Even Saudi Arabia needs $98-a-barrel oil to balance its budget, estimated Edward Morse, head of commodities research at Citigroup Global Markets.
For Saudi Arabia and other major oil-producing countries, “oil production and exports are a primary source of government revenues,” Mr. Morse wrote in a recent research report. “The oil prices required for oil revenues to balance government budgets are far higher than the $70-90 range, with several countries requiring oil prices of well above $100.”
He estimates Venezuela needs $161-a-barrel oil to break even this year after decades of cronyism and mismanagement of its energy sector under the leftist government of Hugo Chávez. “Venezuela is a world-class example of economic mismanagement,” Dr. Yergin noted. Oil prices below $80 a barrel “will be devastating.”
And then there’s Russia, which acknowledged this week that its economy had fallen into recession as a result of Western penalties over Ukraine and falling oil revenue. Over half of Russia’s national budget is financed by oil and gas revenue. This week, Russia’s president, Vladimir Putin, canceled Russia’s long-sought gas pipeline to Europe through Bulgaria and Serbia, which would have bypassed Ukraine.
Both Mr. Putin and Mr. Chávez came to power in the wake of economic turmoil brought on by the plunging oil prices in 1998. Mr. Putin succeeded Boris Yeltsin in 1999 after Russia defaulted on its sovereign debt. He vowed to restore Russia’s financial credibility and modernize its economy. Whether the latest oil price plunge and recession have any impact on his geopolitical adventurism remains to be seen. Mr. Chávez was elected in 1998 in the face of social unrest and falling oil revenue after OPEC imposed cuts in output.
Both Mr. Putin and Nicolás Maduro, Mr. Chávez’s successor, have been vocal critics of the United States. Two other nemeses of the United States — Iran, which gets half its budget revenue from oil exports, and the militant group ISIS, which finances much of its activity from oil sales — will also suffer from low prices. The geopolitical consequences of low oil prices seem so aligned with the United States’ foreign policy interests that “some conspiracy theorists are saying that the U.S. and the Saudis want to punish the Russians and Iran,” Mr. Cinquegrana said.
Moreover, two of the world’s largest emerging economies — China and India — are net energy importers, and their economies should benefit from low prices.
History suggests there will be far-reaching consequences from the latest plunge. “You have to keep your eye on potential social and political unrest,” Dr. Yergin said. “We’re just at the beginning of this cycle, and there are likely to be unforeseen consequences. But for the global economy as a whole, my view is this is very positive. Cheaper gas prices in November mean more money in cash registers in December.”