- Jun 6, 2007
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It is really surprising that the American people are not hearing from national politicians or economic leaders that the dramatic drop in oil prices the world is seeing holds potential grave danger for America's economy and calls for government action protection. The major concerns aren't being properly appreciated. First, there is no floor on the price of oil; today, WTI is trading at around $46/ barrel. In the next three months the country could see WTI trading in the $30 to $40 range. The super serious problem about this drop is that it will at some point result in the dramatic reduction in domestic production because the price will not provide sufficient profit considering the cost of drilling for oil. This is super serious because it will expose the country to skyrocketing spikes in oil prices if something happens to the world-wide supply of oil which could easily happen with a serious negative geo-political development with a major oil producing country or if OPEC and Russia can begin agreeing to control production!
The public debate is really not taking place on the issue of is this out of control decrease in oil prices really good for the medium and long-term well-being of America and if not can the American people do anything about it. Prudent thinking indicates the American people should be alarmed as all get out with this development. People should be asking themselves what happens after two more quarters of this $30 to $50 barrel of oil, does danger lurk here? After two more quarters of this retail businesses, airlines and health care companies earning are going to be up significantly because the American consumer will have a lot of additional money to spend because of lower petroleum and natural gas prices. In this six months OPEC countries and Russia will have learned their lesson crystal clearly that they are cutting their own throats not controlling production because now oil is half the price it could be with production controls. In two quarters from now, Saudi Arabia will find it as easy as pie to do what they wanted to do around three months ago which is to get a universal agreement amongst these parties to cut production and return the price of oil to the $100 range.
Now what do you think is going to happen in six to nine months when Saudi Arabia engineers a return to $100 barrel of oil? A recession for the United States because all these retail and other corporations that have been recording high jumps in quarterly earnings from increased U.S. consumer spending their executives can't just say sorry investors sales dropped due to the return of $100 a barrel oil no they are going to layoff employees big time scrambling to try to generate the investor expected revenue numbers. The resulting layoffs and other economic fallout from a return in oil prices will cut economic demand thus cutting GDP resulting in a recession. It is unbelievable that the country's political and economic leaders aren't warning of this likely recessionary outcome from this precipitous drop in oil prices and offering leadership on how this can be avoided.
There is another disastrous development from this sinking of oil prices. The size of the U.S. domestic oil producing industry is going to be substantially reduced as oil producing companies have to sell themselves because with such low oil prices they cannot generate the revenue to survive. Further bond investors and lenders for these producers are going to be economically hurt so severely during this period they won't get over this for at least the short to medium term already many of these producers bonds are trading at large discounts over concerns the producers won't have the revenue to repay the bonds. Therefore, from this oil price roller coaster ride Congress and the President is letting take place in America the country is going to be left with a smaller and weaker oil producing industry that is less able to get credit to drill for more oil and natural gas and meet America's needs.
Common sense indicates clearly what the answer to this problem is which is that Congress and the President need to pass a law putting a floor on oil prices. The legislation could start with a floor of $45.00/barrel and give the Secretary of the Energy Department, with the Senate Energy committee having veto power, the power to raise the floor up to $75.00/barrel - the standard for the Secretary should be that the floor price should be such that in all major oil fields in America, whether shale, off-shore or other, the floor price would still make such drilling profitable so such production does not stop. The legislation could have a time limit of five or seven years so if there is bad repurcussions from this legislations the harm would be limited and this period of time would give the oil industry and the country time enough to prepare for a market with no controls and stop the economic earthquakes that are currently going on!
The American people are really not being lead to appreciate how vulnerable they are to oil prices shooting back-up. It would only take Opec and Russia agreeing for just four years to take one to five million barrels a day off the market an easy deal for them to reach to reverse things. They could start with a cut of one million barrels a day and meet on monthly basis to increase it to raise the price of oil to their desired level. Remember Opec and Russia don't have to reduce supply to exactly world-wide demand to get their desired price; oil prices are driven hugely by the efforts of speculators so Opec and Russia only have to convince the speculators they have the power to control prices and they will be back in the drivers seat on price and Opec and Russia with a deal like outlined above and implementing it will achieve this needed objective. The bottom line is that a return to a hundred dollar a barrel of oil is easily possible and anyone that says otherwise is a huge fool!
The other thing is that below $50 a barrel of oil is not good for America not by a long shot. America has invested heavily in electric cars, smaller cars, natural gas trucks, fuel efficient planes, etc. to succeed in a world with high priced petroleum. Cheap oil throws these plans into disarray and will thus cause significant economic impact and at minimum medium term harm as this transformation falls into a state where the economic sense of such transformation is very much hurt as demand for this transformation falls off because of low oil prices. Leaders of America need to lead America off its dependency on oil and the mantra need to be no turning back, America long-term well-being depends on it!
The public debate is really not taking place on the issue of is this out of control decrease in oil prices really good for the medium and long-term well-being of America and if not can the American people do anything about it. Prudent thinking indicates the American people should be alarmed as all get out with this development. People should be asking themselves what happens after two more quarters of this $30 to $50 barrel of oil, does danger lurk here? After two more quarters of this retail businesses, airlines and health care companies earning are going to be up significantly because the American consumer will have a lot of additional money to spend because of lower petroleum and natural gas prices. In this six months OPEC countries and Russia will have learned their lesson crystal clearly that they are cutting their own throats not controlling production because now oil is half the price it could be with production controls. In two quarters from now, Saudi Arabia will find it as easy as pie to do what they wanted to do around three months ago which is to get a universal agreement amongst these parties to cut production and return the price of oil to the $100 range.
Now what do you think is going to happen in six to nine months when Saudi Arabia engineers a return to $100 barrel of oil? A recession for the United States because all these retail and other corporations that have been recording high jumps in quarterly earnings from increased U.S. consumer spending their executives can't just say sorry investors sales dropped due to the return of $100 a barrel oil no they are going to layoff employees big time scrambling to try to generate the investor expected revenue numbers. The resulting layoffs and other economic fallout from a return in oil prices will cut economic demand thus cutting GDP resulting in a recession. It is unbelievable that the country's political and economic leaders aren't warning of this likely recessionary outcome from this precipitous drop in oil prices and offering leadership on how this can be avoided.
There is another disastrous development from this sinking of oil prices. The size of the U.S. domestic oil producing industry is going to be substantially reduced as oil producing companies have to sell themselves because with such low oil prices they cannot generate the revenue to survive. Further bond investors and lenders for these producers are going to be economically hurt so severely during this period they won't get over this for at least the short to medium term already many of these producers bonds are trading at large discounts over concerns the producers won't have the revenue to repay the bonds. Therefore, from this oil price roller coaster ride Congress and the President is letting take place in America the country is going to be left with a smaller and weaker oil producing industry that is less able to get credit to drill for more oil and natural gas and meet America's needs.
Common sense indicates clearly what the answer to this problem is which is that Congress and the President need to pass a law putting a floor on oil prices. The legislation could start with a floor of $45.00/barrel and give the Secretary of the Energy Department, with the Senate Energy committee having veto power, the power to raise the floor up to $75.00/barrel - the standard for the Secretary should be that the floor price should be such that in all major oil fields in America, whether shale, off-shore or other, the floor price would still make such drilling profitable so such production does not stop. The legislation could have a time limit of five or seven years so if there is bad repurcussions from this legislations the harm would be limited and this period of time would give the oil industry and the country time enough to prepare for a market with no controls and stop the economic earthquakes that are currently going on!
The American people are really not being lead to appreciate how vulnerable they are to oil prices shooting back-up. It would only take Opec and Russia agreeing for just four years to take one to five million barrels a day off the market an easy deal for them to reach to reverse things. They could start with a cut of one million barrels a day and meet on monthly basis to increase it to raise the price of oil to their desired level. Remember Opec and Russia don't have to reduce supply to exactly world-wide demand to get their desired price; oil prices are driven hugely by the efforts of speculators so Opec and Russia only have to convince the speculators they have the power to control prices and they will be back in the drivers seat on price and Opec and Russia with a deal like outlined above and implementing it will achieve this needed objective. The bottom line is that a return to a hundred dollar a barrel of oil is easily possible and anyone that says otherwise is a huge fool!
The other thing is that below $50 a barrel of oil is not good for America not by a long shot. America has invested heavily in electric cars, smaller cars, natural gas trucks, fuel efficient planes, etc. to succeed in a world with high priced petroleum. Cheap oil throws these plans into disarray and will thus cause significant economic impact and at minimum medium term harm as this transformation falls into a state where the economic sense of such transformation is very much hurt as demand for this transformation falls off because of low oil prices. Leaders of America need to lead America off its dependency on oil and the mantra need to be no turning back, America long-term well-being depends on it!
