Friday, November 28, 2014

Welcome to the oil war

No, not a war in the Middle East.

I'm talking what appears to be a pricing war being waged by key OPEC players to undermine America's higher cost shale drillers.

For months, the price of oil has been tumbling, and it appears to be falling far faster than any real drop in global demand. It can be argued that producers like Saudi Arabia are targeting intentional damage to U.S. producers. Think short term pain for long term gain.

Reuters quotes oil analyst Iain Armstrong: "It is a question of who blinks first - OPEC or the U.S. shale producers. The longer the oil price stays at these levels the greater chance a U.S. shale producer will go under. But it will take time."

Conventional wisdom has been lower oil prices will bring an American economic upturn.

Not necessarily. Not this time.

Cars and trucks are more efficient. So consumer savings from cheaper gasoline aren't as significant as in the past. And any cost savings are likely to be eaten up by higher prices for other forms of energy, or for other necessities. Health insurance costs are rising. Residential property values are rebounding, likely meaning higher property tax burdens for families.

We also have to factor lost of jobs in the American oil patch. We have more jobs there now, that's more jobs at risk. If OPEC intentionally under-prices what U.S. drillers can match, job losses and other economic hits to the U.S. economy could be significant. Railroads are already starting to see impact.

A decline in oil production, brought on by under-pricing competitors, could mean a significant hit to U.S. GDP.

Was a time, the U.S. government would have taken steps to defend against price dumping by an aggressive foreign competitor. But the Obama adminsitration probably isn't all that interested in defending U.S. shale drillers. Fact is, the Obama team may have goals that are quite the opposite.

Update: From CNBC, more widespread potential economic badness from falling oil prices

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