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Crude Economics
Petrostates Still in Peril After Oil’s Rebound

How’s this for a recovery? Oil prices are up nearly 10 percent in trading today, with Europe’s Brent crude benchmark and America’s WTI both above $32 per barrel. That’s putting oil on track for its biggest weekly gain in three months, and looks to be a remarkable turnaround from the sub-$27 levels—12 year lows—markets hit earlier this week.

But even that gain won’t be enough to calm the oil industry, or placate concerns of the world’s petrostates. Before the rebound, Venezuela, one of OPEC’s most cash-strapped members, was pushing for an emergency meeting of the cartel in light of the prolonged bearish market, with the country’s Oil Minister Eulogio del Pino mentioning a desired price of $60 per barrel. Reuters reports:

Del Pino said $60 per barrel would be a fair level.

“We are consulting with various ministers of producing nations to arrange an extraordinary OPEC meeting,” said del Pino, also head of state oil company PDVSA, according to Twitter postings and comments broadcast on the company’s radio.

“We want to invite non-OPEC nations because we are well below equilibrium prices … All countries are announcing investment cuts and firing workers. It’s a sorry situation.”

This isn’t the first time Caracas has called for OPEC action, and it’s hardly a surprise—Venezuela is one of the world’s producers hardest hit by bargain oil. But it’s hard to see OPEC straying from its charted course at this point, as none of its members seem likely to agree to cut production in the quantities necessary to send prices back up again, and perhaps more importantly, do not trust their fellow cartel partners to make any agreed-upon cutbacks. Sub-$40 crude appears to be the new normal, and petrostates will continue to have to make due as best they can.

But what does this mean for the United States? Well, according to the New York Times, cheap oil isn’t the economic boon it perhaps once was:

Lower oil prices historically were a cause for celebration in the developed world, including the United States. The effect was akin to a tax cut for consumers who could fill their gas tanks for less money. And since much of that oil was imported, the windfall was generally larger than the damage to domestic oil producers. […]

But this time is different. The losses from lower prices are larger and quicker than expected as energy companies cut back on investment and lay off workers, while the gains are smaller and slower to materialize, as consumers save some of their windfalls.

To a certain degree, this makes sense. Thanks to fracking, American energy production has boomed in recent years, and that has necessarily made the oil industry a more important player in the broader economy. That, in turn, makes the bear market more painful to the economy than perhaps it once was.

Still, consumers benefit from cheap gasoline, Americans are able to heat their homes for less money (an especially welcome development for our East Coast readers currently bracing for this weekend’s snow storm), and companies not directly involved with the energy industry are enjoying cheaper inputs.

Cheap crude may not be the American economic stimulus many hoped for, but it could always be worse: just look at OPEC.

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  • Pete

    Earth to to Mead & Company. Come in please.

    On net, cheap oil is good for the U.S. economy.

  • Jacksonian_Libertarian

    America is 7 years into “Great Depression 2.0”, and the average family is saving $600 a year in energy costs. This is awesome for America even if some of the employees of Shale oil developers have lost their jobs, the average American saw his income increase by $600. I personally paid $1.65 per gallon this week and filled my vehicle which still had 1/4 tank, with $15, wow. Screw OPEC and the rest of the price gouging scum, I hope they suffer for a very long time, as they have certainly earned their place in hell. This is Karma in action, and every member of a modern civilized culture, should sit back and enjoy watching OPEC and Russia squirm in agony.

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