When Oil Prices Drop

Jan 5, 2015

The news media has trumpeted the 80 cents a gallon drop in gasoline prices over the last six months as a real savings for consumers.

This drop in gasoline prices reflects a huge global oil glut. Oil production is up, especially right here in the U.S., where production has risen from five million barrels a day in 2008 to an average of about nine million, according to the U.S. Energy Information Administration. That four million barrel increase is more than either Iraq or Iran, the second and third largest OPEC producers after Saudi Arabia, produces each day. Today, the U.S. accounts for 10 per cent of the world’s oil production, more than any other country, even more than such big oil exporters as Saudi Arabia and Russia.

On the other hand, even in the U.S., with its supposedly “strong recovery,” gasoline consumption is still lower than it was in 2007. And no, the main reason for that drop is not more fuel efficient cars and trucks. According to the U.S. government, the number of miles that people in the U.S. drive is still lower than it was in 2007, despite the fact that the population is increasing at a rate of about 1 percent a year. Working people just don’t have the money. A smaller percentage of the population has jobs, and those with jobs are earning less. The job situation is so bad, many more young adults can’t even afford a car.

With demand down and production way up, the U.S. economy has been importing much less oil from countries like Angola and Nigeria. So, those producers have been compelled to sell their oil to China and other Asian markets at steep discounts, compounding the impact of American production on world markets and driving down crude oil prices faster.

Today, the average price of crude oil is about half what it was just six months ago. This depressed price has deepened the crisis on economies that depend on oil exports, such as Russia, Iran and Venezuela–causing worsening unemployment and galloping inflation in those countries. But big cuts are also expected in parts of the U.S., such as Texas and North Dakota, that depend on oil production for both jobs and state and local government budgets.

The big drop in oil prices could also be amplified by the financial system. Back in the early 1980s, when an oil glut led to steep crude oil price drops, some banks went bankrupt, including the sixth largest, Continental Illinois, as vast loans to oil producers were not paid back. The same could happen again–but much worse–because of massive speculative holdings in the oil industry by big Wall Street financial companies, which have quietly and stealthily, through shell companies, gained ownership of a stunning amount of oil capacity.

Because all of this activity is carried out in secret, no one knows how big the financial losses will be. But one thing is clear: the fall in crude and gasoline prices does not mark in any way a step in economic recovery, but merely another stage in a very long economic crisis and depression.