Oil is, without a doubt, the lifeblood of the entire U.S. economy. Neither the coffee that allows America’s workforce to function in the morning nor the romanticized stores of alternate energy sources fuel the economy; oil makes the U.S. economy tick. The price of crude oil has fallen exponentially over the last 18 months (priced over $110 in the summer of 2014, less than $33 last week), and it’s throwing the U.S. economy out of whack. Americans are saving at the pump; gas prices average $1.79/gallon. Oil companies are scrambling to stay afloat as their production costs climb above the revenue they can make off of selling oil. Historically, the general consensus was that cheap oil was good for an oil-driven economy, but ironically, stocks are plunging due in large part to oil’s inconceivably low prices. The future of the U.S. economy is vague, but oil will absolutely play a key role in where it turns next.
There is an argument to be made that the economy is about to get a whole lot worse. Saudi Arabia is currently the largest producer of oil. In a report a couple weeks ago, the Economist magazine detailed that Saudi Arabia’s financial situation is in tatters. Oil makes up a tremendous portion of their economy, and since their oil firm is state run, the government is hurting. The low price of oil is vaporizing government money, and Saudi debt is piling up. In order to right the ship, Saudi Arabia could multiply the price of oil. Competitors who can undercut the price will be few and far between. Since the price of oil began falling, oil rigs in the U.S. have fallen by two-thirds, reducing U.S. oil output. In addition, if the next U.S. president re-imposes sanctions on Iran, the main Middle Eastern competitor to Saudi Arabia, there will be little competition to stop Saudi Arabia’s high prices. Gas could jump to something like $5.50 a gallon, grinding the U.S. economy to a halt and plunging it into a deep recession.
There is also a case to be made that the U.S. economy will rebound and grow in 2016. If Saudi Arabia heightens their prices now, they will enjoy their hefty profits for only a brief time. Oil rigs in the U.S. will rebound quickly, and it’s very possible Iran will stay on the market. These fears will paralyze Saudi Arabia into keeping prices where they are. With oil prices low, most companies’ costs are down. When the first business quarter ends in March and earnings are released, most companies will do well. Stocks will rise, and the economy will grow.
These two situations are generalizations. Though high oil prices could cause a recession, they would actually revive the U.S. oil industry. Each situation is double-sided. In addition, though oil is a main factor, there are many other determinants at play within the economy, which could tweak its path. One near surety, however, is that the longer oil prices remain low, the more expensive oil will be when prices rebound. Low prices will chip away at more and more producers, giving those that remain an ever greater share of the market, allowing them to drive prices up higher when the oil market bounces back.
The perturbing thing about all of this is that America appears helpless to control its own economy. The U.S. business climate is swayed more by the whims of Saudi oil gurus and Iranian officials than its own citizens. This is the cost of globalization. Opening up trade, communication and information costs state sovereignty and autonomy. So ought the U.S. to close its borders and act independently? No. Not only would the cost of oil increase, but the cost of everything would rise if the U.S. isolated itself. Globalization leads to low prices with the possibility that they become high; isolation guarantees high prices. And I’ll take the former.
