Friday, January 29, 2016

Not a Conundrum to Everyone

Producers hire tankers for long-term storage (Arabnews)
The price of West Texas Intermediate crude oil has fallen from its 2011 peak of over $100 per barrel to about $34 today. While producers understandably have experienced financial pain, consumers far outnumber producers, hence the net effect of the price drop on the world economy should be positive, but so far it hasn't played out that way. 

The current oil conundrum has baffled economists [bold added]:
Cheaper fuel should stimulate global economic growth. Industries that use oil as an input are more profitable. The benefits to consuming nations typically outweigh the costs to producing ones. But so far in 2016 a 28% lurch downwards in oil prices has coincided with turmoil in global stockmarkets. It is as if the markets are challenging long-held assumptions about the economic benefits of low energy prices, or asserting that global economic growth is so anaemic that an oil glut will do little to help.
The low price of oil negatively affects far more than the petroleum sector. The burgeoning alternative energy industry (wind, hydro, and especially solar) depends on a moderate differential, not a chasm, between its cost and oil, and alt-energy capital projects and equity prices have been scaled back. Lower costs on cleaner forms of energy have accelerated the shift away from a battered coal industry. Loan defaults and bankruptcies from levered energy companies are like aftershocks to a financial sector still recovering from 2008.

The pain is immediate, while the widespread benefits are realized more slowly. If the world can avoid political instability from stressed producers, in a few years we'll wonder what the fuss was all about. Meanwhile, enjoy the $2 gas.

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