OPEC stated goal is to keep oil prices stable in the international economy, though they definitely haven't been doing a good job as oil as fallen from $115/barrel to around $70 in a short time. This is partly due to a slow world economy, but mainly to the increase in supply of oil from North Dakota and Texas. Oilmen in the US have worked to improve drilling of oil from shale, which was previously believed to not give oil. This has raised America's oil production to nearly 9m barrels a day, only 1m b/d behind Saudi Arabia's output. There is now a surplus of oil.
These low prices should boost the global economy according to the author. A typical American "might be $800 a year better off--equivalent to a 2% pay rise." Countries that import a lot, like Euro zone, India, Japan, and Turkey are also benefiting. The author argues global GDP should rise because "this money is likely to be spent rather than stashed in a sovereign-wealth fund." The falling prices should lower inflation even more, "and so may encourage central bankers toward looser monetary policy."
However, not everyone benefits. "Oil-producing countries [like Venezuela, Nigeria, and Russia] whose budgets depend on high prices are in particular trouble."The overall economic effect seems to be positive, but it will only last as long as the prices stay low. Saudi Arabia has adopted a strategy: "let the price fall and put high-cost producers out of business." This will decrease supply and cause prices to rise. This is already happening and "a rash of bankruptcies is likely" which will hurt shale-oil's reputation.
In the short run, many shale-oil wells may close, but some will persist into the future. The technology is new, and rapidly improving in efficiency. The cost has fallen from $70/barrel to $57/barrel in the past year. The firms who survive will have more shall to exploit, and not only in the US. The investment in shall oil is also much smaller the investment for conventional oil fields.
Overall the changes in oil economics should produce more stability. According to the author "America's shale is a genuine rival to Saudi Arabia as the world's marginal producer. That should reduce the volatility not just of the price but also of the world economy." This is an interesting case in which we can see many of the macroeconomic principles we have learned at play.
Source: http://www.economist.com/news/leaders/21635472-economics-oil-have-changed-some-businesses-will-go-bust-market-will-be
This is great news that oil production is flourishing in the US. Internationally, a price decrease cannot come from OPEC action. They can have control on decreasing their production, but not decreasing the market prices. Other oil producers such as Russia cannot increase the oil prices too. They can do the same as OPEC, increase or decrease the oil production. It would be nice to see the government back the US oil industry so there can be long term success. This would lessen the risk for producers. In the long run, it will also result in a mix of fair competition, lower volatility, and fair oil prices.
ReplyDeleteThe article brings up an interesting point regarding wealth being stashed in sovereign wealth funds. Other countries whose economies rely mostly on oil want oil prices to be high so they can turn a higher profit. However, these individuals are already rich and likely won't consume most of the money they are making. Low oil prices are better for the world economy because average consumers are benefiting from the low prices and consuming the extra money.
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