Economics is not as complicated a subject as people make it out to be. If you have too much of something, prices fall. If you have too little, prices rise. Lately the world has had too much oil, thanks in large part to a dramatic increase in supplies from the United States and Russia as well as the rise of efficient plug-in vehicles. As a result, prices on world markets have tumbled from a high of $115 a barrel in June to just $88 a barrel today. Ali al-Omair, oil minister of Kuwait, says prices should stabilize at around $77 a barrel, according to a report by Reuters, bringing prices even lower.
The report goes on to say that Saudi Arabia now admits privately it is willing to see oil prices remain low for 1 to 2 years. This is surprising because traditionally the Saudis have been committed to keeping the price of crude close to $100 a barrel. Since it supplies 1/3 of all the oil that comes from the OPEC nations, it is the big dog in the group and generally dominates its policy discussions. The next OPEC meeting is scheduled for November 27.
Lower prices are putting a strain on the economies of many smaller OPEC members. Venezuela in particular is pushing hard for production cuts to get the price of crude oil back closer to the $100 a barrel benchmark. But sources say Saudi Arabia is concerned that if it cuts production, other countries will not follow along, which means the Saudis might lose market share to the other nations. Bickering among the members is never good for a cartel.
One factor in the Saudi calculations is how oil prices affect production around the world. Higher prices make it economically feasible to employ costly production methods such as shale gas reclamation and drilling in extreme deep water environments. If the price of oil goes down, those alternative sources will no longer be profitable, so world supplies will decrease and prices will go back up. That’s the theory, anyway.
Here in the US, the energy boom is directly tied to fracking. America is close to producing all the energy it needs for the first time in a very long time. There is so much oil around that prices for consumers are plummeting and export rates are rising. For example, unleaded gas for my trusty Honda Civic was just $3.08 a gallon this morning – nearly a dollar less per gallon than when I bought the car. If I close my eyes and ignore the horrific environmental damage fracking causes, I should be a happy camper.
But I’m not. The world’s thirst for fossil fuels is a cancer on our planet. Apart from the environmental damage it causes, it also promotes warfare and terrorism. What all oil producing countries fail to include in their economic and political calculations is the massive destruction their product causes. By focusing on the price of a barrel of crude oil, we must not lose sight of the need to find safe, efficient alternatives to fossil fuels as quickly as possible. The urgency becomes greater every day.