Guardian.co.uk
Be careful what you wish for. That’s one of the lessons that should be apparent as the price of oil continues to plunge.
It’s certainly true that falling oil prices are one of the few bits of good news to be had as the US heads into what will likely be a nasty recession. It will be far easier for consumers in the US and elsewhere to weather an economic downturn with oil at $60 a barrel, rather than at $145. But some analysts are suggesting that oil could fall to $50 per barrel, or even lower, and stay at that level for months or even years to come. Such a sustained period of low oil prices could hurt the long-term interests of both the EU and the US.
First, cheap crude will likely short-circuit the push for renewable energy, increase greenhouse gas emissions and slow the push for greater fuel efficiency. We’ve seen this happen before. The surge in oil prices that occurred after the 1973 oil embargo didn’t last. As prices softened, so, too, did the interest in solar power, wind power and other technologies. The best hope for the renewable energy sector is a sustained period of high prices for fossil fuels of all types, from coal and oil to natural gas.
As for climate change, we can argue all day about the appropriate level of global carbon dioxide emissions. But if policymakers really want to decrease carbon dioxide emissions, cheap oil is the last thing they should want, as low-cost motor fuel will allow the US, as well as developing countries like China and India, to keep pounding on the gas pedal. In China, some 25,000 new cars per day are hitting that country’s roads. By 2013, the International Energy Agency expects the number of motor vehicles around the world to increase to some 1.2bn. The more cheap fuel there is, the more those vehicles will be used and the more carbon dioxide gets pumped into the atmosphere.
Cheap crude could short-circuit the push for greater automotive fuel efficiency, both in the US and elsewhere. Motorists respond to high fuel prices. Over the past two years or so, as gasoline prices soared, sales of more fuel-efficient cars jumped dramatically. If crude (and therefore, gasoline) prices continue to fall, US motorists are more likely to continue driving big cars, pickups and SUVs.
A collapse in oil prices would also hammer America’s domestic oil and gas sector. We’ve seen this before, too. In the early 1980s, the smart people in the energy business were convinced that high prices were here to stay. That illusion ended with the oil price crash of 1986, after which drilling rigs and valuable oil field equipment was cut up and sold for scrap. Skilled oilfield workers left the industry for good. Today, the global energy sector continues to struggle with a shortage of skilled talent for nearly all segments of the business, from engineers to welders. A collapse in prices will result in a replay of the 1980s when skilled workers fled the oil and gas business for other industries and never returned.
A collapse in oil prices would increase US reliance on foreign oil, as well. Once again, we’ve seen this happen before. Back in 1985, when global prices were relatively high and America’s domestic oil industry was on the upswing, US crude oil imports fell to 3.2m barrels per day, their lowest level since the early 1970s. By 1993, with prices at about 50% of their 1985 levels, crude imports had more than doubled, to nearly 6.8m barrels per day. Furthermore, Opec’s share of those crude imports rose from 41% in 1985 to 54% in 1993. (In 2007, Opec’s share of the US crude import market was 53.7%.)
If we experience a prolonged stint of low crude prices, the US oil industry will, once again, fall on hard times. That will likely mean that foreign producers, who generally have lower production costs, will increase their share of the US oil market, and they will do so at the expense of domestic producers.
Furthermore, low prices will exacerbate Mexico’s already perilous economic situation and may increase the flow of Mexican immigrants northward. Given America’s renewed focus on immigration issues, this issue gets scant attention. But the facts are clear. Mexico has long depended on oil revenues to fund its government. In 2006, the Mexican government got 37% of its revenues from cash generated by the state-owned oil company, Pemex. A sustained period of low prices would devastate Pemex, an inefficient company that has struggled to keep production up at its largest and most important oil field, Cantarell. That field is the world’s second-largest oilfield, (behind Saudi Arabia’s Ghawar) and production from the field has been falling by about 8% per year. Without substantial oil revenues, Mexico’s already weak central government will become weaker still. As conditions in Mexico deteriorate, the country will have more impoverished workers who will be inclined to migrate northward in search of better opportunities.
Finally, cheap oil undermines the US ethanol industry. Regardless of your opinion about the corn ethanol subsidies and mandates, cheap oil makes the economics of ethanol – made from corn or other substances – much more difficult. And with many ethanol companies declaring bankruptcy in recent months, the problems will only grow. Rumours are now surfacing that the ethanol sector may seek a bail-out from Congress. If low oil prices persist, the potential for a bail-out becomes more probable.
The punch line here is obvious: Cheap oil may be good for the short term, but the longer-term consequences could be painful indeed.
Original text here: http://www.guardian.co.uk/commentisfree/cifamerica/2008/oct/30/us-econom…
