Gas prices in Flint, Michigan after oil dropped below $50/barrel, January 6, 2015. Joshua Lott/Getty Images
I am sitting outside my office enjoying a surprisingly warm winter day here in southern California, while the rest of the country is shrouded in a deep freeze. As my mind wanders, I cannot help but reflect on the recent and amazing development in my field of passion: oil. I have been involved in the liquid part of the energy field for the last 10 years. It is my favorite pastime.
For years, through Fuel Freedom Foundation, which I co-founded, we have demonstrated and preached that the price of oil is too high, and that lower oil prices would be the best thing for both the U.S. and the global community. Then, within just a few short weeks, oil price dropped 50%! By all rights I should be doing back flips. So while sitting here outside my office and bathing in the winter sun, why am I still worried?
Before answering this question, let’s look at what low oil prices do and why they are so desirable. I’ll start with my good friend Pshemeck. Pshemeck is a new immigrant from Poland. He was a champion fighter there. Now he trains people that would not get off their couch unless a boxing champion shows up at the door to force the issue. Pshemeck has a family of four. He and his wife drive extensively as do his teenage children. Four people, four cars. This is not dissimilar to most Americans. Pshemeck told me that with the current, low price of gas, his family saves $4,000 a year. “It is like getting a raise without needing to pay taxes.” Taking it nationally, this decline in oil price represents a $300 billion stimulus package delivered directly to the consumers’ pockets. It is of the same order of magnitude as the stimulus bill that helped get the U.S. out of the great recession - but without the need to wait for “shovel ready” projects.
A massive drop in the price of oil, not during a recession, has happened twice before: during the Reagan years and during the early part of the Clinton Administration. In both cases, within eight months the U.S. economy got close to full employment. I think that history will repeat itself. 2015 will be the year that the middle class finally gets a break. And as employment picks up and middle class Americans get their first meaningful pay raise in years, the Fed will be forced to move from its accommodating stance and raise interest rates.
However, not all is well with this picture. The price of oil collapsed not because a competitor emerged that won against it in the market. It declined because the Saudis decided that in the current geopolitical constellation, and the current supply and demand picture, a lower oil price serves them better than a higher oil price. So what is wrong with that? The answer is hidden in the Saudis’ budget. This year, for the first time ever, the Saudis are going to run a $40 billion deficit. Although that does not sound like much, it is more than 20% of their anticipated revenues. And what’s more, it is not sustainable.
So where does it all lead us? All things being equal, it seems that the short term looks pretty rosy for everyone, but as soon as the liquidity dries up, both interest rates and oil prices are set to rise. And when that happens, the party, and this bull market, will be over.
But there is hope, if we use this opportunity of low oil prices to open the fuel market to competition, as demonstrated so clearly by the documentary movie PUMP www.PUMPTheMovie.com (now available on iTunes). We can eat the cake and have it too. We can make fuels from natural gas, ethane (which is sold now for $0.20 a gallon), propane (which is now sold for $.50 a gallon), and many biomass feedstock, all of which are structurally less expensive than gasoline and are more environmentally friendly. In times like this, we need to be play makers not merely spectators.
- Eyal Aronoff is the co-founder of the Fuel Freedom Foundation, as well as a co-founder of Quest Software.
