Cheaper oil will only increase our petro-dependencyby Paul Bledsoe / January 21, 2015 / Leave a comment
Good economic news, at last. The 50 per cent freefall in oil prices is a huge “shot in the arm for the global economy,” as the International Monetary Fund put it, boosting worldwide spending and employment everywhere but petro-states. United States growth has hit a 10 year high to an annualised 5 per cent; Americans will save an average of $550 per household from lower prices in 2015 alone. In the UK, cheap oil pushed inflation down to 1 per cent, below wage growth (1.6 per cent), so beleaguered workers are finally making slight gains in real terms, with total employment reaching new highs and retail sales booming.
Geopolitical mavens seem satisfied that low prices have undermined the Organisation of the Petroleum Exporting Countries’ long-held pricing power, as member states battle for market share amid declining revenue, while exerting extreme political pressure on oil-soaked regimes from Moscow to Tehran to Caracas. And prices may fall further and stay lower as structural elements in the global oil market—softer demand in Asia, more efficient cars, and desperate oil-funded governments pumping like mad—seem to suggest. Amid such unrelieved blessings, is there a fly in the ointment anywhere? Can all the news be good? Of course not. Cheaper oil reinforces the very habits of petro-dependency that put the world at the mercy of oil sheiks in the 1970s, and continues to make our economies vulnerable to oil price volatility and price spikes. Every major global recession for the last 40 years has been preceded by a large run-up in oil prices. Oil revenue also funds terrorism and autocratic regimes the world over, preventing diversification of many developing economies while exacerbating western trade debt.
These economic and geopolitical concerns prompted industrialised nations to pursue counter-measures—auto efficiency mandates, oil taxes, ethanol subsidies—over the last four decades, but these policies have only marginally reduced oil dependence and vulnerability to price spikes. The US, for example, still relies on oil for more than 90 per cent of its transportation needs, with figures nearly as high in many other nations.
But under what possible circumstances could consumers, governments and investors really be convinced to leave a commodity as…