Friday, July 17, 2015

How Terrible: Oil May Get Cheaper

The headline in USA Today shouted: "Iran deal boosts fears of global oil glut."

Of course, I had to read the story to see who was afraid and how serious this whole glut business could be. Surprise! The fearful are those who devote their lives to gambling on Wall Street, and apparently their concern relates only to the possibility the mega-oil companies of the world may see their profits, and thus their stock values, fall a bit.

Let it flow, let it flow, let it flow
Michael Cohen, an energy analyst at Barclays, was among the  fearful. According to Barron's, he said, "Iran's efforts to raise oil exports could not have come at a worse time, given the market's lingering oversupply."  He promptly was contradicted by other experts who pointed out that Iran is not in a position to immediately dump a billion gallons of oil on the world market.  It will take six months or more to gear up production, although some reserves have accumulated and could be released sooner.

Hey guys. Do any of you care about the effects on the folks who use oil products? I can't think of anything those of us who are forced to fill the gas tanks of our vehicles to survive in this modern world have to fear from stable or lower  prices.  I can think of several reasons for us to celebrate.

1. Lower oil prices may hurt economies of producers such as Russia, Venezuela, Nigeria, and Saudi Arabia, but they help net oil importers, including the U.S.  Lower oil prices make our companies more competitive. More important, they put extra dollars in the hands of consumers, and consumer spending drives most of our economy.

2. U.S. oil producers have been on a drilling and pumping spree since fracking technology made increased production possible. If world prices drop, some of that activity will stop or decline as it becomes too expensive. Problem? Heck no. Fracking can have very serious environmental effects.  If we need less of it, that is all to the good.

3. Unless our politicians are willing to accept continued deterioration of our roads and bridges, they must raise taxes, and the most convenient way is to increase existing per gallon taxes at the pump. Here in Michigan, even with a decidedly anti-tax legislature, our pols are flirting with a deal that would increase our tax by 34 cents per gallon by 1217.

The federal government so far has shown little interest in a tax increase, but it cannot support that position forever. The highway trust fund is unsustainable.

Of course, tax increases will reduce or eliminate the positive effect of lower oil prices on consumers, but at least they will not cut into our present spending power much, if at all. And we'll have a better and safer transportation infrastructure.

If benefits such as these promote fear, I would like to be terrified.


Rummuser said...

There are serious issues involved here apart from the general fall in prices of oil which is very welcome. In the middle east, the Sunni Arab countries with oil reserves who have been firmly on the side of the West are suddenly wary of the overtures to Iran and the Russians are also quite enthused with the development of freeing up Iran from its blockade so that they can supply arms badly needed by Iran. I think that there is going to be some very interesting times in that part of the world, that is, if the Iranians sign, which seems doubtful now with the clergy expressing doubts.

Dick Klade said...

Right, Ramana, the biggest issues are the nuclear program and a variety of sanctions. The oil question is somewhat secondary. There is a way to go before the deal becomes reality. The U.S. Senate is mounting considerable opposition here.

Anonymous said...

Many taxes are collected for structural repairs, but the money often goes into a general fund and never reaches the road repair projects. Rare exceptions for federal dollars are the pet projects some Congressmen want.

As for gas and oil. Higher prices also hit many businesses very hard as you know. My SIL has a business that is heavily affected by gas and and prices.

Lastly, what goes down will come back up. An economists I worked with at Bell did a price elasticity study of gas. It's not elastic. People buy what they need. If the gas portion of the budget increases, other purchases suffer.

Wall Street is only a barometer of economic good and bad times. Also most investors are institutional investors....I.e. Pension plans and the like. One reason so many cities and other government entities suffered so badly in the last economic turndown was because their municipal funds were invested in stocks.

Economics is not called. The dismal science for nothing.

PiedType said...

This is one of those great global issues that is so far beyond my control that I simply can't worry about it -- although it wouldn't hurt my feelings at all to see a lot less fracking going on. I do get very upset about fracking.

Tom Sightings said...

I like your point of view which is ... you're right, we haven't heard enough of lately. Less fracking is good; higher gas taxes are good, too, since it might mean we'll burn a little less oil and put fewer hydrocarbons into the atmosphere. I'd only add that we should put some of that extra money into improving public transportation as well, esp. subways and railroads.

Dick Klade said...

And, Tom, a few more dollars devoted to developing wind and solar energy use wouldn't be a bad thing, either.