Economics: What Is Wrong With Cheap Oil?

(Drivebycuriosity) - Oil prices have been on a free fall. Recently WTI, the gauge for US oil, hit the $20 mark and Brent Crude, which represents international oil, dropped to $25. The oil price drop causes a lot ado. The US President himself tries to talk the cartel of oil producers, Opec, into cutting oil production and to raise oil prices again (cnn). It seems that many observers including Bloomberg, Reuters and other media outlets agree with an organized production cut. What is wrong with cheap oil?

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Today oil costs about the same as in the year 2003, in the 1990s and before 1973 ( charts above; the second chart is inflation-adjusted and on logarithmic scale). Low oil prices in the 1990s fueled a period of dynamic economic growth, Bill Clinton`s economic boom  run partly on cheap oil. Falling oil prices made the 2010s to a decade without a recession, continuous economic growth, a record low jobless rate & strong stock market gains (driveby).

The return to cheap oil is a huge stimulus economic program and a gift for the global economy. It  helps to smooth out the the carnage caused by the cornonavirus & the lockdowns. So far the demand for gasoline did not drop to zero in the US. The Energy Information Administration (EIA) reports that the weekly US gas demand decreased  to 6.7 million b/d. This time last year, drivers were using about 9.2 million barrels a day of gasoline (cnbc). According to these numbers about 70% of the economy is still burning gasoline and is already benefiting from cheaper energy. That goes along with a guessing by a Manhattan firm who estimates that the shutdown idled 29% of the US economy so far ( marketwatch).

Dropping prices for oil & gasoline work like a tax cut. Consumers worldwide have more money to spend for other goods & services. So cheaper energy prices stimulate consumer spending which accounts about 70% of the US economy. Dropping energy prices also translate into lower transport costs - thanks to cheaper Diesel - helpful for the still running supply chains for food and other necessary goods. The sharply falling energy prices are curbing inflation and reduce so the risk that the $6 trillion stimulus programs (government plus Federal Reserve loans) could lead to a hyper inflation.

Opec isn`t our friend. In 1973 the organization cut oil production drastically (wikipedia ) in order to punish the US and Western Europe's for their support of Israel`s Yom Kippur War against an alliance of Arabian states. Then the oil price quadrupled and jumped to $60 which caused the infamous oil crisis ( oil embargo). Oil stayed expensive until the early 1980s which caused sharp recessions and a decade of economic stagnation and a dormant stock market. In the 1980s Opec lost power and oil prices began to fall (chart above) which supported and a long period of economic growth. Rising oil prices after the year 2000 caused a period of economic stagnation.

Why do the President and many others take side with the oil cartel? Cartels are outlawed in the US. Antitrust laws prohibit that group of independent market participants collude with each other in order to improve their profits and dominate the market (wikipedia ). The American cartel ban aims to protect the consumers.  Doesn`t the President respect the law? The new pro-cartel attitude is somewhat fishy.  A lot of trust busters in the US are going against Amazon and other Big Tech companies, claiming that these companies act monopolistic and harm the economy (driveby). Why does the US government want to support an aggressive and unfriendly foreign cartel? If the government wants to protect the US oil producers (including the frackers) they could support them financially like they do with the airlines. I  wonder why should Putin cooperate with Trump and should help him to save America´s oil industry when the US is showering Russia with sanctions?

If the US is still based on law the politicians should forget about colluding with Opec.