Politics & Policy

Good News on Oil Prices

But the overall economy has a long way to go.

The world oil price is now an apparently faithful reflection of the many political and economic forces that are contending for preeminent influence on the morale and prosperity of the world. The Obama administration, straddling inelegantly between environmentalists and the conventional seekers of economic growth, has indulged fracking and other methods of exploitation of energy from shale, and has somewhat liberalized off-shore drilling, but has been resistant to the Keystone XL pipeline that would convey heavy oil from the Western Canadian tar sands to the Gulf Coast. Saudi Arabia has relentlessly increased domestic production and forced down prices, partly to continue its longstanding practice of reducing the oil price whenever the United States cranks up to reduce oil imports, and partly, in this case, to complicate the lives of the shale-oil extractors, who have relatively high production costs. But the apparently principal motive in the Saudi policy is to put such a rod on the backs of the Iranians and the Russians that they scale back their meddling in Syria, where the Saudis are committed to the overthrow of the Assad regime, and the closing of the spigot to the terrorist apparatus of both Hamas in Gaza and Hezbollah in Lebanon. Saudi Arabia is also trying to squeeze Iran’s nuclear program, in the absence of any plausible action by the United States to stop it, and as a last play before the Israelis have, once again, to do the world’s dirty work for it and take down the Iranian nuclear development sites. The Saudis were never concerned about Ukraine, but the comparative moderation recently pledged by Vladimir Putin in that country, having annexed Crimea, is a bonus, completely unearned by the ineffectual waffling over Ukraine of the United States and Western Europe, which has done precisely nothing to reduce its reliance on Russian natural gas.

The failure of the OPEC majority last week to secure reduced oil-production levels to raise prices must be almost the end of this cartel. The smaller producers were crying for price increases to raise the value of their reserves and, in some cases, to maintain the fountain of cash that they have gleefully deployed for various categories of mischief-making, ranging from Iran’s subsidization of the most heinous terrorist organizations other than the Islamic State (which regards even the loopy ayatollahs of Iran to be soft on Islamic practice), to ankle-biting agitation such as the neo-Castroite antics of the late Venezuelan despot Hugo Chávez. Finally, diversity of sources, alternative energy, economic sluggishness, conservation measures, and especially greater attention to the gasoline consumption of automobiles have all had their negative impact on the oil price. Supply and demand cannot be ignored for long, and the declining economic growth of China has further dulled demand. The oil price has also suffered from the over-commitment to the service economy; millions of office workers, lawyers, traders, consultants, and their clerical support do not use energy as the extractive and manufacturing industries do.

The cut in wholesale oil prices from $100 a barrel to the present (approximately) $66 a barrel amounts to a $125 billion tax cut for the American public, and has vitally assisted in pushing corporate profits to an expected total of $1.87 trillion, or 10.3 percent of GDP. This is good for almost everyone. Although they are claiming a greater share of credit than they deserve for this good news, the clean and green industries are going to suffer as the need for their nostrums declines, although they have won a victory of sorts and the oil extracted by horizontal drilling is a good deal more environmentally friendly than traditionally extracted oil (though they generally oppose it anyway). The fact, as established by economist Julian Simon and others, is that the long-term trend in energy prices in market economies is almost always lower, as supply expands in response to demand increases. In constant dollars, the oil price is now back almost to where it was in the early Seventies, before it spiked up by over 100 percent in the late Seventies, and descended again by about 75 percent between 1986 and 2008.                             

But this has not spurred neck-snapping economic growth. It is a sign of the confusion induced in the financial markets by years of drifting through the uncharted and dangerous fiscal waters of mountainous debt and weakening currencies that oil-price reductions have tanked stock markets around the world. By normal criteria, they should be celebrating. Most of the financial press has been lamenting the decline in the oil price as indicative of slowing growth and spreading deflation, but as it is both a tax cut and a price cut in the most vital commodity except for food, it is a spur to profitability, which must lead to some combination of increased saving, investment, and capital spending. Of course, it will not be a panacea. Alan Greenspan’s warnings about the long-term discounting, through rates on long-term bonds, of the value of almost all currencies is not contradicted by the decline in the oil price. That decline is a deflationary development even if it is principally a straight supply-demand response and secondarily a reflection of political realities as meted out by the Saudis. This oil-price decline is the most vivid illustration we have had yet of developing stagflation: The price decline has a welcome effect on disposable income, but responds, at least in part, to the sluggishness of the long-awaited strong economic recovery. The fact that the U.S. economy is inching upwards at 2.4 percent illustrates that there is no strong recovery, even with the cost of gasoline at the pump down from almost $4 to about $2.78.                                                                                            

The ingredients of real recovery remain what they have been: serious and consistent political leadership from the United States that firmly pursues sensibly defined American interests and does not allow itself to be duped or spooked by troublesome refractory regimes or trivially aberrant ones. Among these defined American interests must be the swift reestablishment of the U.S. dollar as a hard and reliable currency by ending the federal deficit, ending the U.S. balance-of-payments deficit (and achieving energy self-sufficiency will be a giant step in that direction), recalibrating entitlements in a way that responds to greater longevity and a lower birth rate, backing the U.S. dollar with some believable yardstick (such as a combination of oil, gold, and consumer goods), and consolidating all public-sector debt in what amounts to a national sinking fund to the reduction of which adequate government income will be dedicated. The tax system, apart from simplification, chronically needs to incentivize the repatriation of manufacturing and not to incentivize the acceleration of the velocity of money through mere transactional activity that creates no value. There is absolutely nothing wrong with deal-making, but it is no substitute for extracting resources, converting resources to useful products, and fabricating components and assembling them as finished goods.                                                                           

For now, the United States should rise above the fatuous discouragement of much of the media and celebrate, as anyone who puts gas in his car or pays his heating bills can, that the dangers of dependence on foreign energy sources, decried by President Eisenhower during the Suez Crisis of 1956 (when it was only 10 percent of national needs), by President Nixon during the Arab boycott of 1973–74 (when it was above 20 percent), and at different times by all the presidents since, have been resolved. Americans can also be grateful that there is some possibility that the world can take care of itself despite the abrupt and disorderly withdrawal of the United States from it, after more than ten years of expensive military commitment to the Middle East that has probably produced no useful strategic benefit to the U.S., and after a financial crisis that laid bare the incompetence of the central, lending, and merchant bankers of the world (with only a few exceptions, such as the Canadians), and after an orgy of federal debt that has increased the accumulated total of nearly a quarter-millennium of American independence by 80 percent in six years. The fact that the United States has endured all that and still has a rising currency shows how ineptly managed most other large economies have been. Digging out from under America’s debt will require time, discipline, and determination, but there is no doubt that the United States is a fundamentally strong country that will respond to serious leadership when it finally elects it again.      

— Conrad Black is the author of Franklin Delano Roosevelt: Champion of Freedom, Richard M. Nixon: A Life in Full, A Matter of Principle, and Flight of the Eagle: The Grand Strategies That Brought America from Colonial Dependence to World Leadership. He can be reached at cbletters@gmail.com.


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