Tue | May 23, 2017

OIL’S MIXED BLESSING

Published:Wednesday | December 17, 2014 | 12:00 AM

It's certainly a nice feeling to see the pennies falling off at the gas pumps or to get cheaper light bills. Yes, the world price of oil is plunging, relieving pressure on the dollar and giving us all something of a breather.

However, there appears to be a game of high-stakes global poker going on just now. Rather than relax or spend any resulting windfalls, our leaders will do well to use the window to prepare for what may come.

There's some debate as to what's behind the fall. If oil prices stay low, it may reveal that global growth is weaker than expected. With China slowing and Europe in the doldrums, the demand for energy has dropped. In that case, prices may remain low, but only because our export partners are weakening. In the short term, Jamaica is a bit insulated from this effect by the fact that its principal North American markets are not caught in the downturn.

But if the slump lingers long enough to keep oil prices down for a good while, the US and Canada will inevitably be affected. Already, the Canadian stock market has revealed anxiety that the country, which has a substantial energy sector, will suffer.

On the other hand, it's also possible that the price fall is supply-driven, and not principally a result of weaker demand. Some analysts speculate that Saudi Arabia is using its market power to drive down oil prices so as to push American producers to the wall. The rapid expansion in US output as firms use hydraulic fracturing technology to open new fields has flooded the world market with extra supply.

THE RESULT OF FRACKING

However, fracking, as it is called, is a relatively expensive form of production that only makes sense when world prices are high. In the short term, oil prices at $60 a barrel might not dent US production. But it could inhibit future investment, reducing future output as fields dry up - which they tend to do rather quickly with this form of production.

In that event, the global supply of oil will fall, and prices will eventually recover. Indeed, some analysts are predicting they will be back above $100 next year. That may be a tad optimistic for most experts, but it is safe to say that we should proceed as if we are taking from one drawer to put into another: if oil prices stay low, our savings will eventually be eroded by reduced exports, whereas if exports remain strong, our savings will be gobbled up by future price rises.

Along the way, we will be dealing with a potentially more volatile global environment. Saudi Arabia remains the heavyweight producer in world oil markets. Rather than cut output to boost prices, it has opted to maintain current levels. This may represent a move on the kingdom's part to reassert its regional position by weakening its rival Iran - which wanted output cuts - and even moreso ISIS (the Islamic State in Iraq and Syria), which has been secretly selling oil to finance its war.

Meanwhile, low oil prices are delivering a body blow to the Russian economy. That could persuade President Putin to improve currently frosty relations with the West to lessen sanctions. But it could equally push the country into more militantly nationalist politics, which plays well at such times.

Closer to home, these oil prices will make life very difficult for the Venezuelan government. Any hope it has of exporting its revolution will have to take a backseat to preserving it at home.

So if we use this window to prepare for the return of high energy costs, we will have used the time constructively. If we spend the dividends, though, we may get stiffed with the bill before too long.

n John Rapley lectures at the Centre of Development Studies at the University of Cambridge. Email feedback to columns@gleanerjm.com.