The U.S. price of oil has been cut by half since June 2014 and is still falling. Since the price of gasoline is tied to oil this is, in the short-term, a boon for the consumer. There are optimistic forecasts of increased economic growth, based on the additional purchasing power the price drop is generating. This may be true (again, short-term), but an economic shift of this magnitude has far-reaching impact, and is worth a deeper analysis.
There are several issues involved. The explanation for the oil price collapse is the “global glut of oil”, precipitated by increased U.S. production from new drilling technologies (fracking, etc.). But oil is not the only commodity with a collapsing price. Many others, particularly metals, have dropped by similar amounts. This points to a reduction in demand as well.
Since most developed economies (U.S., Europe, and Japan) are either stagnating or growing slowly, their demand is stable. The only place where a large drop in demand is possible is China. Economic growth there officially is around 7%/year, so there should not be (again, officially) any demand problem.
China is, however, a command economy, similar to the defunct Soviet Union despite its flirtation with capitalism. The Soviets published admirable growth numbers, ever vowing to overtake the U.S.A. “in the next few years”. The numbers were phony, generated by dutiful party members eager to protect their positions. They were not questioned until a collapse was imminent.
A similar downturn in China would have enormous consequences, and not only in Asia. The Chinese “economic miracle” has long been presented as “the growth engine of the world”. A global economy with China in crisis is, at best, a very large question mark; at worst, a major global depression.
So we must consider that the oil price collapse is, potentially, a harbinger of global recession. Such a downturn would be aggravated by the impact on oil and commodity producing nations, many of which need high price levels to keep their budgets in balance. Once cash reserves are exhausted, austerity follows, consumer demand drops and a downward spiral takes hold.
So we may get a recession. But where is the “energy crisis” mentioned in the title? The answer is simple: Middle East.
The region where the bulk of global oil reserves lies is increasingly unstable. The threat is commonly perceived as terrorism and/or conflict fed by “radical Islam”.
Historical analysis suggests, however, that terrorism and related violence arise in states where both political power and wealth are concentrated in a small minority, with little potential for political representation and economic opportunity for the mass of the population. If no change is possible through lawful means, violent methods will be used by the aspiring opposition. Such violence will be legitimized by appealing to whatever idea or cause is most likely to convince the masses. In this case it is a violent, extreme concept of Islam.
Most of the Middle East – as well as the ex-Soviet republics of Central Asia – is highly vulnerable to this threat. Power and wealth are highly concentrated and the economic prospects poor. Low oil prices will reduce economic growth and curtail whatever remedial welfare programs may be available, resulting in an increasingly explosive situation.
Radicals on the way to power respect economic resources only to the extent such are useful to achieve their political goals. What they cannot control they see as “enemy assets” to be sabotaged or destroyed if it furthers their reach for power. The oil industry is eminently vulnerable to such an approach. Syria, Libya and Nigeria already provide clear examples of the damage radical militancy can do.
If current trends continue there is a strong possibility that Middle East oil production, after the current “glut”, could be sharply reduced due to war and other unrest.
Despite the recent growth in domestic production, the United States still imports close to half of its oil needs. Production growth is now slowing due to low prices. If the Middle East does slide down into disorder, imports will become problematic as well. We will go from surplus to a shortage – further aggravated by current government policies hostile to fossil fuels.
We have previously written in favor of a national energy policy. Recent events, and their potential future impact, make the development of such a policy increasingly important.
Born in Poland, Jacek Popiel was educated in Africa, Canada, and the United States. He speaks five languages. His career spans military and international business development in the Soviet Union, Eastern and Western Europe, North America, and Japan. He is currently a freelance writer and political consultant. His book “Viable Energy Now,” grew out of his military and international business experience and his professional involvement with energy issues.