Got Oil?

Where you stand often depends on where you sit. 

This is evident today in global geopolitics relating to falling oil prices, which also have serious implications for energy development and resource conservation policies in the United States – notably including the State of Alaska.

Oil prices on global markets have plummeted since last summer, dropping by more than half to recent lows under $50 a barrel. 

If you’re like me, you can’t really picture what a barrel of oil looks like or what that abstract price means.  But you can probably appreciate the impact on gas prices at your local filling station, which have fallen nationally to less than $2.50 per gallon after peaking at $3.70 less than a year ago. 

The New York Times recently reported a government study that predicted these low gas prices would save the average American household about $550 in 2015.  I have seen other estimates as high as $1,000.

Writ large, savings like that can only be good for the national economy.  And conservationists can cheer the impact of falling oil prices on the cost-benefit analysis of energy production – lower prices make it less attractive to develop oil and gas in places like Alberta’s tar sands, America’s shale fields, and the Arctic Ocean.  Lower prices at the pump could even make it politically palatable to enact policy measures like a tax on carbon usage, which would promote long-term energy efficiency.

So it might seem odd that lower energy prices are not always hailed as good news.  Why, for example, was the stock market pullback at the end of last year attributed to lower oil prices on world markets?  Wouldn’t lower prices always be a good thing?

At a high level, the reason for concern does not appear to be lower energy prices as such, but rather the underlying reason why prices are falling. 

As I learned in Introductory Economics, market prices are determined by the intersection of supply and demand curves.  Supply is currently very robust, in part because previously lofty prices encouraged investments in high-cost extraction areas such as tar sands and shale formations, and in part because OPEC has maintained its production levels even in the face of falling prices. 

That would be OK with financial markets.  What has them spooked is that global demand is falling, especially in engines of economic growth like China.  With supply high, and demand dropping, the curves intersect at a lower price point.  Not bad in itself, but it creates concern as a reflection of weakening demand, which in turns reflects lower levels of economic activity that can lead to deflation, stagnation and contraction as global economies struggle to regain ground lost to recent economic crises.

And while good overall, the drop in prices creates international winners and losers.  It has directly adverse consequences for big oil producers like Russia, Iran and Venezuela.  Maybe you don’t care too much about them, although it would be worthwhile to think about possible implications for Ukraine (potential increases in aggressive Russian nationalism to distract from domestic economic conditions) and negotiations on nuclear containment (Iran).  On a more positive note, Venezuela’s problems are likely contributing to Cuba’s emerging rapprochement with the United States.

Of more immediate concern in this country, there are some pretty large disparities in the effect of falling energy prices at the state level.  The online news and editorial site Vox did a nice piece on this recently, which you can read at www.vox.com/2014/12/23/7438379/effect-oil-prices-economy.  The story acknowledges the general benefits of lower energy prices but notes that “the picture is different for eight states that rely heavily on oil production:  namely, Alaska, Louisiana, New Mexico, North Dakota, Oklahoma Texas, Wyoming and West Virginia.”

I doubt that any state is as dependent on oil revenues as Alaska, and battle lines are being drawn as the new state legislature begins its session this week in Juneau.  Here is what the Alaska Dispatch News had to say about it:

“The state's $6.1 billion budget is projected to draw $3.5 billion from Alaska’s savings by the end of the fiscal year in June, with at least $3 billion more needed next year unless Gov. Bill Walker and state legislators can find ways to cut the deficit.

“At that rate, the state’s reserve accounts, flush with cash from years of high oil prices, will be gone by 2018.

“Revenues from North Slope oil production pay for about 90 percent of the state’s discretionary spending, and a recent price crash means that Walker and legislators face an uncomfortable few months in Juneau as they ponder short-term and long-term fixes for Alaska’s budget imbalance -- with politically unpalatable choices that could ultimately include new taxes, massive spending cuts or even siphoning money away from the Alaska Permanent Fund.”

http://www.adn.com/article/20150117/juneau-session-budget-crisis-could-spur-cooperation-or-magnify-disputes

Look for important, and perhaps difficult to predict, impacts on issues such as development versus conservation in the Arctic Refuge, the NPR-A and the Arctic Ocean.

This could get interesting.