The High Price of Cheap Oil
“The oil industry, with its history of booms and busts, is in a new downturn,” said Clifford Krauss in The New York Times. The price of oil closed under $40 a barrel this week for the first time since 2009, a 60 percent plunge from its peak last year. The explanation “boils down to the simple economics of supply and demand.” The world is awash in crude, with U.S. oil production doubling over the past six years.
Meanwhile, the economic slowdown in China, the world’s largest oil importer, and sluggish growth in other developing countries are crippling demand. There’s no end in sight for the global oil glut, said Russell Gold in The Wall Street Journal. Lower prices mean even more pressure on oil-producing countries to pump to make up for lost revenues. Saudi Arabia, Russia, and Iraq are pumping as many barrels as they can in order to defend their market share, in a battle that’s looking increasingly like “the energy-industry version of trench warfare.”
“At first blush, $40-a-barrel oil sounds like a beautiful thing,” said Andy Serwer in Yahoo.com. American consumers get cheaper gas, businesses benefit from lower energy bills, and automakers sell more vehicles, especially gas-guzzling trucks and SUVs. But there’s a price to pay for all this cheap oil. Employment in the 500,000-person U.S. oil and gas industry will take a hit as energy companies scale back operations. Cheap, plentiful gasoline could also derail work on alternative fuel sources like solar and wind. Jobs are already being lost in the energy industry around the world, said Debbie Carlson in The Guardian (U.K.).
Last week, Royal Dutch Shell said it would eliminate 6,500 jobs worldwide in response to collapsing crude prices. Because such layoffs tend to lag market prices, “more job cuts could be on the way.” Here in Texas, cash-strapped oil companies are already shifting into “survival mode,” said Rhiannon Meyers and Jordan Blum in the Houston Chronicle. Companies are slashing costs by putting hundreds of rigs into storage and canceling expensive projects, including deep-water drilling and oil sands extraction. “Gone are the days of frenetic growth, lavish spending, and frantic hiring sprees.” The one bright spot: Companies that survive will emerge leaner and more cost-conscious, focused on safer bets in areas with proven resources.
The most dramatic consequences of the oil bust will unfold beyond U.S. borders, said Fareed Zakaria in The Washington Post. “When a similar drop happened in the 1980s, the Soviet Union collapsed.” Countries that rely on oil revenues are “facing a fiscal reckoning” that could fuel unrest. Venezuela’s socialist government has long been propped up by oil, which makes up 96 percent of its exports. Vladimir Putin’s reign has coincided with a steep rise in oil prices, but Russia’s economy is expected to contract 3.4 percent this year. Saudi Arabia, where the royal family spends oil revenues lavishly to preserve its legitimacy, now faces massive budget deficits. Cheap oil may be a boon for consumers, but it will create more uncertainty in an already uncertain world.
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