The
recent drop in oil prices has many economists worried about the state of the
global market. On December 10th, crude prices
hit their lowest in 5 years. The price for a barrel of oil has dropped 30% in
the past three months. OPEC's latest monthly report, issued Friday, only
accelerated the trend. Oil prices have not dropped this low in this short a
period of time since the finance sector imploded in 2008. The 2008 crash was
the expected result of a bubble. Oil peeked at around $150 a barrel before the 2008
crash. The present oil crisis is not merely an expected, if undesirable, effect
of capitalism. It is the manifestation of novel economic factors. The U.S. is
taking a lot of blame from OPEC. The U.S. is flooding the market with shale oil
and gas, while demanding less oil and gas from the world market. This combination
of demand-side and supply-side pressures is what makes this oil crash unique.
This
CNBC piece discusses which countries will "Win" and "lose"
the most from the drop in oil prices. I think mainstream news media needs to dedicate
much more time to the geo-political ramifications of the oil crash. This is
because oil money is the only thing allowing many oppressive governments around
the world to hold up their ends of the social contract they have with their
people. The oil-rich monarchies in the Middle East use their oil revenues to
give their people free energy and myriad social programs. In exchange for these
programs most residents are more than happy to forfeit what Americans would see
as civil rights and liberties. If the price of oil stays too low for too long, there
will not be enough money to buy the indifference to oppression needed to sustain
autocratic rule over an increasingly literate populous. Saudi Arabia, Kuwait and
Qatar have enough hard currency reserves to ride out this price drop. This fact
explains the Saudi Oil Minister's, statement "why cut production?" This comment hints at an OPEC gambit to force
smaller producers out of business. If this is the case, the cartel is taking a
massive risk. The damage to the, relatively stable, commodities backed
securities market alone could initiate a negative feedback loop with disastrous
consequences. Currency devaluation is another huge concern. As of now, most oil-dependant
currencies are being cushioned with various reserves, if the oil slump outlasts
the reserves, a global financial panic is likely.
