Oil is more than a source of energy around the world. It is also one of the more potent forces on the global political scene as well as directly into every home in the world on the local scene.
Light crude oil prices hit a low of $62.50 a barrel this week before closing at $63.33. These numbers are down from the recent high of $78. There has been no formal reaction by OPEC in terms of cutting production as of yet but that is sure to be on the table over the next several months as oil prices will inevitably continue to crash. OPEC may find they are the Dutch boy with his finger in the dike.
The geo political and domestic economic benefits of such an event are most welcome however the high of $78 dollars per barrel and gasoline and home heating prices in excess of $3.00 per gallon may well be looked back upon as watershed events for the U.S. consumer. That price will perhaps be viewed as the straw that broke the camels back in the over all importance of oil. Was it enough to jilt the average American out of their drunken oil stupor?
In the near term high energy prices coupled with foolish interest rate policy by the Fed will most certainly result in a U.S recession in 2007. Any U.S. economic slowdown will reverberate through out the rest of the world. With the U.S consumer dedicating more of their disposable income to heating, driving and the higher cost of money, there won't be as much money left to spend on cheap Chinese imports.
Since the industrialization of China is a recent phenomena it will be most interesting to see how that country deals with its first post modernization economic slowdown. If it is severe enough could it result in social unrest?
Iran is also likely to feel the sting of crashing oil prices. The little fanatic, Mahmoud Ahmadinejad is likely to feel a good deal of pressure as prices and consumption fall. How will the Iranian population react to a reduction in domestic government programs while their government attempts to support an expensive nuclear program as well as trying to rebuild a smashed Hezbollah in Lebanon?
Venezuela is another example of reduced influence as prices decline. Will Hugo Chavez spend more time at home dealing with domestic unrest or on the global road whipping up anti Americanism?
We are not out of the woods yet because $62.50 is still an aberration and is still filling the coffers of oil companies and oil producing states. The question becomes how low will it go? We can look back just three years ago and see that oil was selling at a post 9/11 recession level of $28 a barrel. Some would argue that it is unlikely to reach those levels again because of the rapid growth of India and China and the strong demand they have placed on global production.
Just as important is this demand on production so to has been developments on the consumption side that may very well off set India and China. None more so than the American consumer and consumers in other Western countries realizing that reliance on foreign oil has an unacceptable impact on a country's foreign policy. As a result of strategic and economic concerns, conservation is now happening in every household throughout those countries.
Other factors have contributed significantly as well. It is no surprise that the oil price tumble coincided with the discovery of a huge new deep water reserve in the Gulf of Mexico that reportedly added over 60% to known U.S. oil reserves. America is not the only country busily exploring for oil. The Russians as well as other former Soviet Union countries have been ramping up exploration as well as production dramatically over the past year.
Old wells have also been brought onto line to add to an increasing glut. Wells that were unprofitable at $28 a barrel have been greedily pumping away every minute that the price exceeded that number.
Alternative fuels impact may lessen over the next year or two as oil prices crash, however the alternative fuel genie is now out of the bottle. The historic rise in oil prices resulted in huge investment into ethanol and bio diesel. We saw this once before and that nascent industry withered a bit on the vine but this time it has gained traction via law. With the mandated adding of ethanol to the gasoline mix it guarantees that ethanol will remain on the scene. In addition the public has started to embrace the idea of hybrid consumption vehicles. Once production lines have been set up for such vehicles it will be difficult for the auto makers to turn back.
All in all it has been a very painful year for us but in the long run it may have turned out to be painful but effective medicine.
