The Myth of Cheap Oil

Those of us who drive certainly have noticed that we are paying less for a gallon of gasoline, and if we watch the news, we know that the drop in gas prices is the result of increased crude oil production, particularly in the U.S. Since supply is high, the cost of a barrel of oil has dropped by 40% since June of this year (2014). This is widely touted as good for consumers, who supposedly now have more pocket money to spend on other things, and therefore good for the economy, which is largely driven by consumer spending. So, lower gasoline prices are good, right?

Maybe. There are hidden costs to low oil prices. If the price is less than the cost of extracting the oil from the ground, producers shut down pumps, which in turn means the oil field workers get laid off, which means that they can no longer be consumers. If the economy were otherwise strong, they could get other jobs, but given that the so-called recovery has been weak and has created new replacement jobs that pay less and are less secure, they may have a tough time finding new employment. Low oil prices are also bad news for oil producing countries that depend on oil exports for much or most of their revenues. They may not be able to meet their citizens’ needs or continue to pay back their debts.

Another hidden cost is the temptation for people to drive more, thus increasing the amount of carbon we put into the atmosphere; it may even cause people to buy bigger, less fuel-efficient cars (on the mistaken theory that today’s low prices will last).
Many of these negative effects (and potentially others as well) are not likely to be visible to most people, including politicians, pundits, and economists. Because we have a consumption-driven economy, we tend to believe that lower consumer prices are always good, and that belief prevents us from seeing the longer term negative consequences of prices that are too low. In fact, apologists for consumer capitalism tend to see a silver lining in lower prices in the form of pressure on producers to become more efficient. And where does this efficiency come from? Fortune Magazine recently put it succinctly: “As oil prices drop, producers will undoubtedly renegotiate their ludicrously expensive oil service contracts, slash wages for their workforce and cut perks to bring their costs in line with the depressed price for crude.” Notice that two of the three steps producers will take are cutting wages and cutting perks (e.g., such things as health insurance, which is, in current consumer capitalist terms, a “perk,” not a necessity). In other words, screw the worker.

Lest we think that this is no big deal, simply the cost of doing business in a competitive environment, let’s remember that we have gone through this before.
Remember when most of the goods on retail shelves were made in the United States? Well, some of you may well be too young to remember, but in fact, there was a time when America was a manufacturing nation, when we exported more finished goods than we imported, and when our foreign trade was balanced in our favor (our last trade surplus occurred in 1975, almost 40 years ago). This shift was initially touted as good for American consumers, but since the consumer is also a worker, eventually it hurt consumers—but not to worry, we simply imported more and cheaper (in all senses) stuff, so that poorer American worker-consumers could keep buying. We even changed our ethic from one of savings to one of borrowing.

Consumers unable to keep up with the spending needed to keep the economy “growing” turned to their credit cards and their home equity: the result, most recently, was the implosion of the financial sector in 2008. While it is commonplace and correct to blame the big banks and financial institutions for the 2008 debacle, blame also rests on everyday consumers, who willingly ramped up their borrowing to finance their over-budget spending (not just on food, but expensive electronic gadgets). Irrational exuberance was not limited to Wall Street—it walked on Main Street as well.
But what were worker-consumers to do? From all sides they were pounded with the message to get out and shop—interest rates were low, credit was easy, and housing prices would rise forever. It was our patriotic duty to go out and shop, as President George W. Bush reminded us after 9/11. So we shopped, and shopped, and shopped. Until we dropped.

And in the ruins of the economy, we can see the long-term cost of lower prices. We traded away our industrial birthright for a mess of consumer pottage, only to realize too late how lacking in nutrients such gruel really is.

Actually, I’m not sure we realize that yet.

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