FORTY-ONE YEARS ago OPEC, the global oil cartel, boldly asserted its power with an export embargo that drove the price of crude from $3 per barrel to $12 in just six months. Through subsequent oil shocks of 1978, 1990, and 2008, voices on the left — and a few on the right — have used the specter of $200 per barrel oil to justify reams of subsidies for wind and solar (“just another few years, and they’ll be able to stand on their own — really”), ethanol (“imagine how much we’ll save when oil is $300 per barrel”), and even hydrogen cars ($2 billion spent and still counting). The parade of grants, loans, and tax benefits all rode in the name of securing our “energy independence.”Last week, the West Texas benchmark hit $67 per barrel — a five-year low — and with that milestone the doomsayers’ predictions came crashing down, as well. To be sure, we have seen plenty of valleys among the peaks before. After reaching $140 in the summer of 2008 — just in time for my own re-election campaign — prices crashed to just $40 by January of 2009. But this time may be different.
During the past five years, new exploration techniques have allowed America to surpass all but Saudi Arabia in crude oil production. Meanwhile, changes in driving patterns and fuel efficiency have steadily lowered US consumption from its peak back in 2005. If that combination of growing supply and curtailed demand keeps prices low, the big spenders are going to need a new rallying cry, OPEC might need a new business plan, and Venezuela might need a new economy.
In reality, “independence” for independence’s sake is not a very rational goal — security is what matters. Importing low-cost energy from secure sources in neighboring Canada and Mexico makes good sense for individual consumers and America’s economy as a whole. As it is, the drop in oil prices, if maintained for a year, will save US households roughly $100 billion. A reasonable estimate might be for half of those savings to translate into additional consumption, raising GDP by a few tenths of a percent. A small tailwind for the coming year, but no major boost.
For some domestic energy producers, that economic bonus is of little consequence. Lower prices squeeze profits and put the viability of higher cost oil wells in jeopardy. No one should be surprised to see a handful of weaker firms pull back on new production or even exit the business. That would be music to OPEC’s ears, but a recent Citigroup analysis concludes that most US production remains economically sound even with prices near $50 per barrel.
The cartel appears anxious to test that theory. At its late November meeting, OPEC refused production cuts that would have helped push prices higher. They hope to clear some of the marginal producers from the marketplace by keeping price low.
That’s no consolation to countries that have built their budgets on visions of oil grandeur, and are beginning to panic. In Venezuela, where shortages of food and medical staples have become commonplace, economists estimate that balancing the budget would require oil to reach $160 per barrel. Desperate to deflect attention from economic implosion at home, President Nicolas Maduro lamely protested that American shale oil was “a disaster from the point of view of climate change.” Has he seen the pollution in Caracas lately?
In Russia, the ruble has fallen 40 percent against the dollar this year, and the economy is projected to shrink in 2015. No one should underestimate the ability of the Russian people to endure hardship, but for the first time in recent memory, Vladmir Putin looks vulnerable. In fact, the Russians may be OPEC’s real target here. A decade ago they failed to deliver on promised production cuts, increasing exports instead to reap windfall profits — a slight that Saudi Arabia remembers well.
While it may be premature to predict the end of OPEC, this may mark the beginning of the end. Maintaining discipline within the cartel was much easier in the face of rapidly rising consumption of the 1980s and 1990s. But with global demand slowing and US consumption flat, that unity unravels quickly. Moreover, producing oil is becoming cheaper, not more expensive — and technology is almost certain to continue the trend.
There are still probably a few pundits who cling to the idea of “peak oil” — that a finite supply will one day cause prices to skyrocket. More realistic is the idea of “peak oil power” — leverage of the petroleum producer may have run its course, and with it the power of the “$200 per barrel” boogeyman to drive American energy policy.