Wednesday, December 3, 2014

Every Silver Lining Has A Cloud

I'm sure you've noticed the recent drop in gas prices. I sure have.

Locally, gas prices are hovering around $2.50 per gallon. The national average is $2.76. Factor in the reduction in other associated energy costs (heating, power generation, shipping and transportation, etc.) and the net effect is equivalent to a $125 billion tax cut.

Much if not all of this is due to the rapid rise in production of the Bakken (North Dakota) and Eagle Ford (south Texas) shale oil fields.
U.S. crude oil production, rising steadily since 2008, is likely next year to hit its highest level since 1972 ... Spurred by the use of hydraulic fracturing or fracking in shale rock deposits, U.S. oil production has jumped from 5.0 million barrels per day in 2008 to 7.4 million last year and is expected to average 8.5 million this year and 9.3 million next year, according to the EIA, the analytical arm of the Department of Energy ... “Texas and North Dakota now account for almost half of total U.S. oil production..."
This success story is a great victory for the free market.
U.S. oil production has nearly doubled in recent years to 9 million barrels a day, and the Paris-based International Energy Agency (IEA) expects U.S. supply to rise by more than 1 million barrels a day next year. And it is this supply increase that is driving down prices ... This is not only a triumph of U.S. energy independence, it is a victory for the workings of the free market. Greater supply, not government cartels, is driving down prices.
As energy prices are falling, GDP is being revised higher. Real economic growth in the third quarter shifted up from 3.5 percent to 3.9 percent, led by an increase in business fixed investment. The last two quarters averaged 4.2 percent at an annual rate.
Furthermore, inflation is down and the stock market is up, in large part due to the drop in oil prices. All good news, right?

But every silver lining comes with a cloud. In this case, it's the possibility of economic turmoil and social unrest in other countries that might have negative repercussions for the U.S. and its allies.
Russia, the world’s largest producer, can no longer rely on the same oil revenues to rescue an economy suffering from European and U.S. sanctions. Iran, also reeling from similar sanctions, will need to reduce subsidies that have partly insulated its growing population. Nigeria, fighting an Islamic insurgency, and Venezuela, crippled by failing political and economic policies, also rank among the biggest losers...

Few expected the extent or speed of the U.S. oil resurgence. As wildcatters unlocked new energy supplies, some oil exporters abroad failed to invest in diversifying their economies. Coddled by years of $100 crude, governments instead spent that windfall subsidizing everything from 5 cents-per-gallon gasoline to cheap housing that kept a growing population of underemployed citizens content.

Those handouts are now at risk.

“If the governments aren’t able to spend to keep the kids off the streets they will go back to the streets, and we could start to see political disruption and upheaval,” said Paul Stevens, distinguished fellow for energy, environment and resources at Chatham House in London, a U.K. policy group.

“Russia in particular seems vulnerable,” said Allan von Mehren, chief analyst at Danske Banke A/S in Copenhagen...

Oil and gas provide 68 percent of Russia’s exports and 50 percent of its federal budget. Russia has already lost almost $90 billion of its currency reserves this year, equal to 4.5 percent of its economy, as it tried to prevent the ruble from tumbling after Western countries imposed sanctions to punish Russian meddling in Ukraine. The ruble is down 35 percent against the dollar since June.
I doubt if Putin will sit around twiddling his thumbs as the Russian economy goes down in flames. Look for him to seek out 'opportunities' elsewhere, as he did with Ukraine.

As for Iran:
Even before the price tumble, Iran’s oil exports were already crumbling because of sanctions imposed over its nuclear program. Production is at a 20-year low, exports have fallen by half since early 2012 to 1 million barrels a day, and the rial has plummeted 80 percent on the black market, says the IMF.
The good news: lower prices will "increase the pain" on the Iranian populace. The bad news: that pain probably won't be severe enough to jump-start a revolution, or derail the country's nuclear program. In fact, it might even pressure the mullahs to speed up work on the project, hastening the inevitable showdown between the West and a terrorist state armed with nukes.

Other countries heavily dependent on $100 a barrel oil include Iraq, Nigeria, Venezuela,  Algeria, and Angola. Social unrest in those countries may not directly affect the U.S., but it would open the door for China to step in. Chinese assistance would expand its sphere of influence outside the Pacific Rim at the same time it is expanding its military influence inside it.

So enjoy the cheap gas. Revel in your fast-growing IRA. Turn the thermostat up without worrying about getting a second mortgage to pay the heating bill. But keep an eye on Russia, Iran, and China.

Because we all know obama won't do a damn thing to rein them in...


Bag Blog said...

When I read yesterday's post, I thought about gas prices. Everyone loves to hate big oil companies when prices are up. When prices go down, everyone cheers. But the oil companies don't set the price, the market does - or should I say the Middle East sets the prices. Yes, there is lots of drilling going on around here and that means lots of jobs which means lots of spending, etc. As the oil prices fall, oil companies take it on the chin as their market value falls. Then jobs get cut and spending stops. Throw in the problems you mention in foreign countries and things don't look so good after all.

CenTexTim said...

It just goes to show that there's two sides to every coin.

Old NFO said...

Yep, two sides... Forever in mutual conflict... And you're right, enjoy it while we can!