I’ll say it up front–I don’t understand the complicated economics and geopolitics behind the rapid slide in the international price of oil.
But its clear that the there’s a lot going on, and a lot that we should be paying attention to, beyond the pleasant relief we feel at the gas pumps.
I searched for something like “geopolitics of oil price drop” and found lots of competing theories, some very disquieting if you worry at all about issues of war and peace.
NY Times columnist Tom Friedman has suggested the decline in oil prices could be part of a U.S. effort to undermine the economies of Russia and Iran (“A Pump War?“).
Friedman isn’t alone. For example, check this recent column from OilPrice.com (“Did The Saudis And The US Collude In Dropping Oil Prices?“).
Another theory is that Saudi Arabia is pushing prices lower, and not compensating by lowering production, in order to undermine the boom in U.S. shale oil production. The U.S. has increased its domestic oil production, but the boom relies on high oil prices to sustain the high-cost production techniques.
Here are some articles reflecting this perspective.
Financial Timnes, “Falling oil price raises questions on viability of shale.”
OilPrice.com, “Low Oil Prices Hurting U.S. Shale Operations.”
Business Insider, “The Pace At Which US Rig Counts Are Tumbling Is Unusually Intense.”
Then it starts getting complicated.
Reuters, “Saudi Arabia is playing chicken with its oil.”
The kingdom has two targets in its latest oil war: it is trying to squeeze U.S. shale oil—which requires higher prices to remain competitive with conventional production—out of the market. More broadly, the Saudis are also punishing two rivals, Russia and Iran, for their support of Bashar al-Assad’s regime in the Syrian civil war. Since the Syrian uprising began in 2011, regional and world powers have played out a series of proxy battles there.
While Saudi Arabia and Qatar have been arming many of the Syrian rebels, the Iranian regime—and to a lesser extent, Russia—have provided the weapons and funding to keep Assad in power.
Since the U.S. invasion of Iraq in 2003, the traditional centers of power in the Arab world—Egypt, Saudi Arabia and other Gulf states—have been nervous about the growing influence of Iran: its nuclear ambitions, its sway over the Iraqi government, its support for the militant groups Hezbollah and Hamas, and its alliance with Syria.
The conflict is now a full-blown proxy war between Iran and Saudi Arabia, which is playing out across the region. Both sides increasingly see their rivalry as a winner-take-all conflict: if the Shi’ite Hezbollah gains an upper hand in Lebanon, then the Sunnis of Lebanon—and by extension, their Saudi patrons—lose a round to Iran. If a Shi’ite-led government solidifies its control of Iraq, then Iran will have won another round.
Today, the House of Saud rushes to shore up its allies in Bahrain, Yemen, Syria and wherever else it fears Iran’s nefarious influence. And the kingdom is striking back at Iran, and Russia, with its most effective weapon.
Center for Geopolitical Analysis, “It’s dangerous to corner Russia too much.”
In any case, oil politics is complicated, interesting, and potentially dangerous.
Please share any good explanations or analyses if/when you find them.
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In addition to the two you’ve mentioned, I’ve read:
3. Saudi Arabia was tricked by American companies into using a horizontal fracking technology that means the oil well in which it has been used can’t be turned off without its being permanently ruined. (Weird, I know.)
4. The oil companies are trying to kill off the development of alternative energy sources by making them uneconomical. (Oddly, I’ve also read that lower oil prices will, in the long term, ensure the economic *success* of alternative energy.)
5. There is an enormous glut of oil, and Saudi Arabia needs the money too much to cut back.
6. This is insufficient demand for oil because of slowdowns in Europe and China, and Saudi Arabia needs the money too much to cut back.
7. $40 or $50/barrel would be the historically normal price for oil, and $100+/barrel was just a bubble that popped.
8. By making tar sands temporarily uneconomical, the United States is getting other countries to use up all their oil first so that in the end, only we will have any oil left and we can then charge whatever price we want.
Also, pretending to be a Fox News “pundit”:
9. Obama is trying to destroy the economies of the oil states, all of which are Republican.
All of which goes to show that the Truth can be difficult to discern in our age…
How about a theory that explains how we experience the highest gas prices nationally at the pump on a tiny island which boasts two oil refineries?
There is no question: current low prices are due to the Saudi’s maintaining production.
Their motives are anyone’s guess. But the bigger question, to me, is how our elected officials both locally and nationally will handle this.
If our local leaders are smart, they’ll take this unexpected savings in energy costs and apply it to cash-purchase of PV/energy efficient capital purchases.
Additionally (and ideally) this would be an excellent time to bring the gas tax up a notch; locally and nationally.
This is not a windfall. It is just a lull.
My money is on a severe upswing around 4q 2015.
If you have time, a good book to read right now would be “The Colder War: How the Global Energy Trade Slipped from America’s Grasp,” by Marin Katusa. It’s very informative by someone who seems to have an amazing grasp of the topic.
A few interesting articles on energy:
The solar industry in the US now employs more people than does coal mining (depending on how one interprets the numbers…):
http://www.slate.com/blogs/moneybox/2015/02/23/solar_jobs_growth_the_industry_now_employs_more_workers_than_coal.html
Apple’s value is now more than double that of Exxon:
http://blogs.wsj.com/moneybeat/2015/02/23/apple-is-now-more-than-double-the-size-of-exxon-and-everyone-else/
Exxon’s stock is going down because its oil production is declining. Partly, this is due to falling oil prices and subsequent reduced investment.
http://www.wsj.com/articles/exxons-profit-drops-21-1422882396
But there is something else going on, it seems.
http://www.nytimes.com/2015/02/03/business/energy-environment/exxon-mobil-q4-earnings-decline.html?_r=0
Sounds a wee bit like peak oil, that point where global oil production ceases to grow (although Exxon claims that its production will rise in 2015).
Where is oil heading? This guy says it’s going down to $40 – and staying there.
http://www.forbes.com/sites/thomaslandstreet/2015/02/25/why-oil-will-fall-to-40-as-obama-looks-the-other-way/
It’s a facinating analysis because it points out how US energy policy – as guided by BOTH political parties! – has traditionally been domestically conservationist, and has discouraged oil development in the US for strategic reasons. This might lead to a fascinating question: Why has this strategically based conservationist policy toward oil development in the US been overturned? It could be that in a sense there is a new kind of energy insurance policy, if only tacitly. If in the past the government’s strategic thinking was to preserve the US’s oil stocks, now diversification away from oil and investment in renewable energy sources is the new energy insurance policy. So, ironically, because of the fall in solar PV panel costs and because of tar sands development in Canada and the rise of new fracking technology in the US, preserving traditional US oil sources is strategically irrelevant. Put another way, oil is falling in part precisely because governments like that of Germany invested heavily in solar energy. In some respects, this might confirm the Jevons paradox (the rebound effect), that lowered energy prices caused by innovation (solar in this case, but more efficient coal-burning turbines in Jevons’ example) lead to falling energy prices. For Jevons, this meant not long-term decreased energy use, but a return to increased consumption and higher prices. This is in fact what we now see in the US with a rise in the purchase of large trucks and SUVs….
This guy says oil prices will go down to $10/barrel.
http://www.bloombergview.com/articles/2015-02-16/oil-prices-likely-to-fall-as-supplies-rise-demand-falls
And this guy says oil is going to stay where it is now. He judiciously points out that oil prices are falling not just because of increasing production, but declining demand. There is no revolution.
http://oilprice.com/Energy/Oil-Prices/Is-Oil-Returning-to-100-Or-Dropping-To-10.html
But let’s go back to the top stories above, about solar versus coal, and Apple versus Exxon. What progressives have been saying all along seems accurate. The cost of solar energy has been falling as it has been adopted, and it is becoming an industry that can provide jobs. Again, oil production at Exxon was flat in 2014.
But what conservatives have been saying is also true. Decreased government interference and new technologies are, at least in part, driving down the price of oil with a vengeance.
So both sides of energy policy are, in their own ways, correct. So one would assume that in the long-run, the developed world should remain committed to renewable energy development, while seeing increased oil production as a temporary salvation that puts higher oil prices and consequent economic dislocations – which would make investment in alternative energy prohibitively expensive – farther off in the future.
It’s looking more and more that ‘peak oil’ – that point where global oil production peaks and then declines – is a long way off. The oil company British Petroleum claimed back in the 2000s that oil production would peak in 2013, and then revised its forecast after the 2009, saying that the recession would push peak oil back to 2015. Yet here we are. (Some oil scientists insist that peak oil, in terms of conventional crude oil, actually happened back in 2006, but now we are venturing into unconventional hydrocarbon extraction. But it is oil prices that are relevant.)
But now it is argued that PEAK COAL is upon us. Coal usage is declining. The world is full of coal, so it is a decline in consumption, not production.
http://www.slate.com/articles/business/the_juice/2015/03/peak_coal_yes_the_u_s_and_other_big_economies_are_falling_out_of_love_with.html
There is an observation that there has been a historical progression from less energy intensive and more carbon-laden forms of energy to cleaner and more efficient forms of energy. Among fossil fuels, this is also a shift from solids (wood and coal) to liquids (oil) to gas (natural gas). But it’s been a gradual change.
http://www.energytribune.com/5265/wood-to-coal-to-oil-to-natural-gas-and-nuclear-the-slow-pace-of-energy-transitions#sthash.K6lQyaAz.dpbs
So what does this mean for Hawaii? Can Hawaii transition away from oil and coal (coal makes up 12% of Oahu’s electricity generation) and shift more to natural gas? Also, can Hawaii do this and still maintain its long-term commitment to transitioning to renewable energy?
The good news is that the price of solar PV is theoretically heading down to zero. Even the termination of government subsidies for solar power cannot stop the fall in solar prices.
http://www.greentechmedia.com/articles/read/The-Solar-Singularity-is-Nigh
The bad news is that electrical grids are complicated affairs, and the alternative, battery storage, is still rather expensive and is a limited market.
http://www.greentechmedia.com/articles/read/german-energy-storage-not-for-the-faint-hearted
One would assume that government subsidies could be (and most likely will be) directed in the future at battery storage.
I have not heard for some time about local senior citizens who invested heavily in solar PV panels. In some cases, they were very gullible, and overbought their PV system, covering the entire roof with panels. Often, to make matters worse, the local utility forbade them from hooking their systems to the grid. So while they thought the system would pay for itself by selling electricity to the utility, instead the customers had to (and still have to) pay for the system themselves AND still pay HECO a monthly bill. (Also, these seniors did not always take into account when their new systems would finally pay for themselves, which might exceed their own lifespans….) Now, of course, the cost of oil is about half of what it was a year ago. This narrow niche of unfortunate seniors who thought they were doing the right thing might be perfect candidates for subsidized battery storage.
On a different, more on the utility of the future:
http://www.greentechmedia.com/articles/read/utility-of-the-future-think-uber-not-att
The impact of cheap oil:
http://www.wsj.com/articles/the-impact-of-cheap-oil-1427770862
Hawaii’s Utility Is Approving a Backlog of More Than 3,000 Solar Installations
http://www.greentechmedia.com/articles/read/Hawaiis-Utility-is-Approving-a-Backlog-of-More-Than-3000-Solar-Installati
Hawaii No. 2 in electric vehicles, federal government says
http://www.bizjournals.com/pacific/news/2014/12/10/hawaii-no-2-in-electric-vehicles-federal.html
The Future of the Electric Car
https://www.greentechmedia.com/articles/read/the-future-of-the-electric-car
In Hawaii, electric vehicles comprise 0.42% of total vehicles.
What could the State do to double the percentage of electric vehicles every two or three years?
Electric vehicles can store electricity from intermittent sources, like solar and wind, helping to solve the problem of grid stability.
As the cost of solar voltaic panels falls on its own with the achievement of mass production, subsidies can be directed toward battery storage and electric vehicles.
Today, you posted on massive traffic congestion experienced throughout the city on Tuesday.
http://www.ilind.net/2015/04/02/star-advertiser-produces-excellent-centerpiece-trafficastrophe/
First of all, even the worst traffic congestion is a luxury. Billions of humans live in dire poverty. Just want to get that in perspective. Traffic congestion is a First World “problem”.
Second, there are a few comments to the post about the need to increase transportation capacity in the city. It’s time to remember the Jevons paradox or rebound effect: Increased efficiency (e.g., of engines) temporarily leads to decreased demand and costs (e.g., of fuel); low (fuel) prices then stimulate consumption and demand, which against raise costs. This also applies to transportation: Increased road capacity temporarily leads to congestion relief, but then people go out and buy more cars and build more houses. (Same similar might be said of telecommunications: More broadband means more entertainment like gaming and videos, but there is no real increase in anything of substance like serious news or scientific research.)
Now, the Jevons paradox is not necessarily a bad thing. New engine efficiencies in England during the Industrial Revolution led to a drop in the price of coal, which lowered the price of manufactured goods, which stimulated demand, which led to the rise of coal prices back to where they once were. But that is a good thing. Factories were indeed grim in 19th England, but those factories mass produced goods that were consumed by ordinary people (wealthy people bought hand-made goods). So, if innovative new engine technology cut fuel consumption per machine in half, in the long run ordinary people could own twice as much clothing and furniture and tools and so forth for the same earlier price. For people who were a hair’s breadth away from poverty (especially by today’s American standards), this was a huge improvement in quality of life.
Same is true for transportation. There was a severe housing crisis in the 1930s and 1940s, with the Great Depression and World War 2 completely squelching housing development. The Federal Highway Act of 1956 – meant for national defense – reshaped the face of the country with new roads, making suburbs possible. Also, new methods of mass production made the building of houses quicker and cheaper. (It took only one day to build a house in the 1950s, although these houses were simple and flimsy and half the size of today’s houses).
http://en.wikipedia.org/wiki/Levittown,_New_York
So in the context of the 1950s, thank goodness for roads and cars and suburbs. The emergence of the suburbs might have been an accident of history, but at the time it seems to have been the only way to quickly provide housing. Also, after 15 years of Depression and total war, the quiet life in the suburbs was a balm for a traumatized generation. In fact, many or even most people still seem to want a house as their life’s dream. Building and expanding the highway system since the 1950s enabled the continuing construction of suburbs, and that is its only possible positive outcome (not traffic relief).
So, commuter traffic congestion is not a problem because it has no solution. Congestion is, rather, a symptom of the rise of suburbs.
Actually, there is only one possible solution — imposing fuel fees to pay for roads rather than relying of property tax. Politically, however, that seems to be a nonstarter because it is unpopular.
This raises an interesting point, though. The real problem might not be traffic congestion or suburbs, but rather subsidies for suburban development. In fact, the libertarian CATO Institute advocates downsizing the mission of the $81 billion federal Department of Transportation.
http://www.downsizinggovernment.org/transportation
What is interesting is that Republicans often target the $66 billion Department of Education.
Going after the Dept. of Transportation runs against serious political and corporate influence, so I am impressed with the integrity (and fanaticism) of the CATO Institute.
In fact, the DOT is the most powerful iron triangle in the US.
An iron triangle is an alliance of politicians, bureaucrats, corporations and labor unions.
In other words, it ain’t about helping people. It’s all about pouring more and more cement and convincing everyone (including oneself) that this is about helping people.
An IRON TRIANGLE is an alliance of politicians, bureaucrats and special interests (corporations, labor unions).
Here’s the wiki on IRON TRIANGLES.
http://en.wikipedia.org/wiki/Iron_triangle_%28US_politics%29
From a university professor:
http://www.auburn.edu/~johnspm/gloss/iron_triangles
In all fairness, let us put ourselves in the shoes of the so-called insiders.
It takes a long time to work out a reasonable, coherent policy – albeit admittedly imperfect – that is palatable to a range of stakeholders.
Occasionally, do-gooders within the elite come along and want to overhaul the system (George W. Bush invading Iraq, and trying to privatize social security). More often than not, these would-be revolutionaries turn out to be inept, and ignorant of basic policy.
Also, while some outside critics have a deeply knowing critique of the system (Ralph Nader), they are idealists who do not seem to offer practical, realistic alternatives (at least, not in the eyes of those inside the IRON TRIANGLE). And many protesters are otherwise apolitical people who crave a greater share of the economic pie as they see others moving ahead as they fall behind, and they have a remarkably incoherent agenda.
From an online study guide:
http://study.com/academy/lesson/the-iron-triangle-definition-theory-examples.html
We think of business versus government, but in some sense, government bureaucracies are businesses, and are primarily motivated by self-interest.
Imagine a hypothetical society in which the government’s computer systems are 50 years old. Basic services would languish in such a society. But it would not necessarily be in the interest of the bureaucrats to upgrade their information technology. It would be more in their self-interest instead to create more departments with more employees, so that established employees could move up the ranks of management. Also, this would be not just driven by a desire for higher salaries and greater security, but for a greater sense of prestige. There is a desire to create new bureaucracies that are “sexy” and have the tinge of being futuristic (e.g., nuclear energy, once upon a time). It’s not an outright scam. It is beleaguered civil servants who face the constant threat of budget cuts fooling themselves about their own motives.