Susan Glasser and Peter Baker are veteran political journalists who closely covered the presidency of Donald Trump, he as the New York Times chief White House correspondent, she as a…
Guest Host: Indira Lakshmanan
Oil prices have plunged more than 70% over the past two years. U.S. stockpiles of crude are at record levels and a slowing global economy is keeping demand for oil low. A proposal by a few members of OPEC to freeze production has gone nowhere and many economists say it wouldn’t significantly alter the oil glut. Several states dependent on oil revenue are facing strained budgets and job losses as the price crash continues. And a number of U.S. companies are at high risk of defaulting on loans, raising the specter of another financial crisis. Guest host Indira Lakshmanan and a panel of experts discuss the oil price crash and what it could mean for the global economy, geopolitics and efforts to limit carbon emissions.
- Kevin Book Managing director of research, ClearView Energy Partners
- Moises Naim Distinguished fellow, Carnegie Endowment for International Peace, and chief international columnist, El Pais; author of "The End of Power: From Boardrooms to Battlefields and Churches to States, Why Being in Charge Isn't What It Used to Be"
- Gillian Tett US managing editor, Financial Times; author, "The Silo Effect"
MS. INDIRA LAKSHMANANThanks for joining us. I'm Indira Lakshmanan sitting in for Diane Rehm. She's out with the flu. Oil prices continue their downward spiral amid the biggest production surplus in more than 80 years. And a wave of oil and gas company defaults is threatening to propel the U.S. into yet another financial crisis. Joining me now in the studio to talk about what's causing the oil price crash, what it could mean for the global economy, U.S. consumers and plans to cut fossil fuel carbon emissions, Moises Naim of the Carnegie Endowment for International Peace. And Kevin Book of ClearView Energy Partners. And joining us from a studio in New York City, Gillian Tett of the Financial Times. Welcome to all of you.
MR. MOISES NAIMHello.
MR. KEVIN BOOKHi.
MS. GILLIAN TETTHi, thank you.
LAKSHMANANYeah, thanks for being here. Throughout the hour, we also want to hear from you, our listeners. We'll be taking your calls and your questions on 1-800-433-8850. You can also send us an email to email@example.com. Or send us a message on Facebook or Twitter. Gillian Tett, let's start with you. Explain for us the trajectory of oil prices over the last couple of years. Where did they start and where are they now?
TETTWell, it was just a couple of years ago that people were thinking that $100 a barrel was the new norm for oil prices. And there was a presumption amongst many observers that they could only get higher. And that has been completely and utterly wrong. In fact, oil prices have fallen about 70 percent. And that's partly because of slowing demand in places like China. It's also because OPEC has begun to unravel. But perhaps the biggest reason of all is the fact that you've had this whole new stream of oil coming into the market, particularly from the U.S. shale development. And, taken together, those three factors have created, if you like, the perfect storm for oil producers and what ought to be the perfect gift for consumers.
LAKSHMANANAll right. So over a course of 18 months, a fall in the price of a barrel of oil from $100 to basically $34 a barrel, I think it is now, Kevin. So, Kevin, Gillian has already given us the overview. Let's drill down a bit on the root causes of the oversupply and the price decline.
BOOKWell, the oversupply is a function of productivity. And when you get right down to it, in a supply-demand context for economics textbooks everywhere, there's this notion that curves re-equilibrate at the proper price. But it doesn't happen instantly. There's a long lead time to oil field investments and there's a long lead time to changes in demand behavior. As a result, what you have are opportunities for things to overshoot and skid past equilibrium over and over again, until they eventually emerge in a new price point. That's kind of what happened.
BOOKShale production was so effective and died so slowly -- or is dying so slowly, that oversupply continues even at a new price point and is likely to continue, essentially pushing the oil market out of balance between the U.S. producers, as they slow down, and the OPEC producers as they relentlessly continue without slowing down, probably until the fourth quarter of this year.
LAKSHMANANIt's funny. Does anyone else remember with me the 2008 campaign where Sarah Palin made her name shouting, drill, baby, drill, and Michael Steele from the Republican National Committee. I mean, it felt like, at that time, the Republican Party was pressuring the country to drill for oil. Now we have U.S. stockpiles of our own crude oil rising 3.5 million barrels last week to an all-time peak above 507 million barrels, according to the Department of Energy. So, I mean, we've come a long way in eight years because of shale, right, Moises?
NAIMIf you ask anyone, what's the most disruptive technology of the 21st century, people would probably reply regarding something that has to do with the internet, with social media, it will have to be something like that. But it -- and, of course, there has been lots of disruptive innovations in that space. But the, really, the one of the changes that has changed the world in many important ways is the way which oil is produced through the shale -- the shale and gas oil, with new technologies, with fracking and all the rest. That has transformed the energy industry in the United States and changed the world.
LAKSHMANANTo the point that the U.S. is now the largest oil producer in the world, having surpassed Saudi Arabia, right, Gillian?
TETTAbsolutely. I mean, it's a stunning change in the balance of oil production, stunning implications for geopolitics. But there's one other thing to consider, which is that thus far the shale revolution -- this huge, disruptive technology as Moises calls us -- has only taken place in America. It seems unlikely to occur in Europe anytime soon. But in many ways, the next piece of the jigsaw puzzle is that shale could start in other parts of the world too. And that could have even wider implications for changing the balance of production, particularly in places like China.
LAKSHMANANWell, I wonder, though, at what point shale oil, at least in the United States, becomes no longer efficient and economically feasible as the price of other oil gets lower and lower? Kevin, I mean, we're talking about this oversupply and we know that tight oil, as it's called, shale oil and some of this more difficult to get oil can be more expensive to produce. Tell us, at what point do those, you know, curves cross, making it just not economically feasible anymore?
BOOKIndira, it's a moving target. What's turned out to be the case is that there's a lot learning going on in the shale fields. There are greater distances for horizontal well borers being drilled. There's better targeting of higher-yielding parts of the shale. And services companies -- the companies that sell fracking services -- have lowered their costs as demand has fallen away. And that, too, has improved the breakeven. So what used to be thought of as something like a $70 or $65 dollar breakeven for shale is now being thought of as something like a $40 or $45 breakeven.
BOOKAnd for wells that have already been drilled and remain to be completed, the cost is lower. Because a lot of the capital expenditures already happened upfront. And some of those wells are being finished right now at breakeven prices in the 20s.
LAKSHMANANWe should probably take a step back for listeners who aren't deep in the oil question and just define shale oil and fracking a little bit. What does tight oil mean?
BOOKSure. What really it means is quite simple. The oil is trapped inside a rock with very tiny pores. And, ordinarily, oil collects in underground reservoirs and that's what you drill into to get it out of the ground. What fracking does is it breaks open the shale and creates channels for the oil that's trapped in the rock to come to the surface through well borers. And the big innovation is really the combination of hydraulically fracturing, using water and a combination of chemicals and sand, to break open the rock, and horizontal drilling into the rock, to maximize the surface area that's being broken apart. That's what's -- finding the right combination of those technologies in the U.S. shale is what's produced so much new volume.
LAKSHMANANAll right. Well, we're talking about overproduction or at least high production. Moises, what about these oil producers? How do they influence the prices that we're paying?
NAIMNot much. And it's very interesting how OPEC, the Organization of Petroleum Exporting Countries, has tried to have a larger influence.
LAKSHMANANThe most famous cartel in the world (word?).
NAIMIt's -- well, but it used to be that. And they now account for about 41 percent of global production. It used to be 45 percent. But...
LAKSHMANANTwo major producers, the United States and Russia, are not even in OPEC.
NAIMAnd not part, nor Mexico is part of that. And it -- but what -- the interesting story there is not how much oil they produce but how little discipline they have. So they may meet and they agree. For example, they most recently -- they agreed not to increase production. But it so happens that they were already at full production. So even if they wanted, they couldn't boost production too much. But the essence of the story is that these are countries that are highly dependent on oil exports and will have -- and they need the money. And it will be very hard for the Nigerias of the world, the Venzuelas of the world...
LAKSHMANANWho are members of OPEC.
NAIM...that to, you know, and others, to cut production because they need the revenue.
LAKSHMANANRight. You're absolutely right. All right, Gillian Tett, Moises refers to this, last week there was talk of an agreement within OPEC to cut production. But explain to us why the proposal fell through. Or is there still a chance that this might happen?
TETTWell, there's certainly a chance that they will try again. But there are two problems right now with their attempts to create any kind of deal. Firstly, as Moises said, many of the key players in the global oil market right now are not actually part of OPEC. They see no reason why they should, you know, take part in any kind of cartel they're not even a member of. And secondly, it does appear that until recently, groups like Saudi Arabia have been trying to pump hard, not just to protect their own budgets, but also because there was a strategy of wanting to do damage to the U.S. shale sector.
TETTAnd of course, in addition to that, as Moises points out, many of these companies are desperate for money, for revenue on the part of their governments. And they just can't afford to take the hit of suddenly cutting production, without knowing whether it's even going to raise oil prices.
LAKSHMANANHmm. And, Moises, of course it's not just about Saudi Arabia wanting to hurt the U.S. shale industry. They have kept their production high and steady in the face of falling prices, in part, to punish their oil-producing rivals, like Iran and like Russia, right?
NAIMAbsolutely. So we are -- that's what I said, that this is changing the world. Because the geopolitical consequences of low oil prices are huge. Russia is hurting and it has huge implications for their international posture in other areas. And the tension that you very accurately point out between Iran and -- Shiite Iran and Sunni Saudi Arabia -- they have been rivals for a long time. They are jockeying for hegemony in the Middle East. They don't get along. And Saudi Arabia has the money and the resources and the will to keep low prices in order to hurt also its arch enemy.
LAKSHMANANHow long can they keep suffering these low oil prices? You know, they're obviously doing it at the expense of their rivals. But how long can they go on like this?
NAIMThey have huge reserves. And they're tapping into their reserves. They are also -- have a sovereign wealth fund. They accumulate funds. And they're not alone. And so they are not liquidating some of these funds. And that's another of the second-order consequences of low oil prices.
LAKSHMANANAll right. We're going to take a short break. And when we come back, we're going to be going to your comments and your questions about the low price of oil. Stay with us.
LAKSHMANANWelcome back. I'm Indira Lakshmanan sitting in for Diane Rehm. This hour, we're talking about the reasons for low oil prices and the effects they will have on geopolitics, the environment and the economy in general, with Moises Naim, distinguished fellow at the Carnegie Endowment for International Peace, chief international columnist at El Pais newspaper of Spain and author of "The End of Power: From Boardrooms to Battlefields and Churches to States, Why Being in Charge Just Isn't What It Used to Be." And Kevin Book, managing director of research at ClearView Energy Partners. And Gillian Tett, U.S. managing editor at the Financial Times and author of "The Silo Effect: The Peril of Expertise and the Promise of Breaking Down Barriers."
LAKSHMANANKevin, before we went to the break, we were talking a little bit about how the producers are suffering as a result of lower oil prices. I want you to tell us who the winners are from low oil prices. I mean, surely $2.00 a gallon gasoline has got to be a good thing for U.S. consumers who remember gas costing more than twice that during the recession in 2008.
BOOKAbsolutely. Every American drives on average about 500 gallons of gasoline a year, if you want to think of it in gasoline gallons. So every dollar they're not spending is $500 in their pockets. And we're talking about $1,000 of differential per driver right now. Very good news but it's also not the big news. A lot of the people who are the most adversely affected by high oil prices and high gasoline costs are the long-distance drivers in low-income areas that tend to be thinly populated. As a result, the people who are living in cities and driving not that much and making lots of money are the ones who are reaping most of the pie in terms of that consumer benefit. So it takes a while to propagate. It's a lagging effect.
BOOKThere's also a second problem, which is that everybody invested in the stock market right now has been affected, at least second order, by the perception that low oil prices could have contagion into the broader U.S. economy, creating a very volatile market environment. It's very easy to feel good about $500 a year or $1,000 a year in your pocket, but not on a day when your portfolio is down by $20,000.
LAKSHMANANWell, if you even have a portfolio, which of course not everyone does. But I think you've gone some of the way to answering the question from a listener, Sage, in New York, who says, I don't understand how lower energy costs caused the stock market to collapse. Can you please help me out?
BOOKOrdinarily, oil analysts like me look at the stock market as a gauge of the health of the world economy. And we think, well, if consumption's going up, oil demand should go up and oil prices should go up. The opposite is happening right now. Right now, the oil market is essentially informing the stock market in a way that it hasn't. Because of recent events, because of the financial crisis, the concern is that overdrawn producers are going to blow up Texas banks, North Dakota banks, and create a failure that has systemic impact into credit markets across the country. And so as prices plummet, there was a fear -- perhaps an overstated fear -- that it was going to spread into a financial crisis that hurts everyone.
LAKSHMANANAll right. Gillian.
TETTThat's not the only reason, though. I mean, another problem is the fact that, as Moises indicated earlier, one of the things that the gigantic sovereign wealth funds in countries like Saudi Arabia are doing to cope with the falling oil prices and the lack of revenue, is they're selling some of the vast equity portfolios they have around the world. And that's having a dampening effect on equity prices. I mean, I was in Japan just last week and there were a number of brokers there talking about the hit from the oil price on the Japanese stock market, which sounds bizarre because Japan is an importer in oil. But that's the connection.
TETTAnd in addition to that, there's also a lot of concern that the very fact you have so many emerging market countries being hurt by lower oil prices, could essentially be a big drag on global growth. And that could essentially wash back into the U.S. shores too.
LAKSHMANANSo you're talking now about the losers. The losers being the people on the producer side, emerging markets who produce oil. Moises, you know, tell us a little bit more about who else is hurting from the oil glut and the plunge in price.
NAIMIndeed. One of the big losers of all this drop in prices is the planet, all the environmental dimensions of all this. Thank about this, last year, the United States, 57 percent of all vehicles sold were pickup trucks, SUVs and crossovers. These are -- and the jump, you know, they -- 17.5 million vehicles of this kind were sold. And these are things that have a tail of 10 to 15 years. So this is a high-consumption of gasoline that is going to be with us for a long time. So the reason that I mention of the conversation that has to do with, what do we do with climate change and emissions and all that?
NAIMThe other very important story here is of course the oil -- the emerging markets that are exporters. All of their fiscal balances -- they have huge deficits -- all of these countries have suffered immense devaluations to their currencies. They have unemployment. They have budget costs...
LAKSHMANANAnd you're blaming this largely on low oil prices?
NAIMFor all exporters, of course.
LAKSHMANANAnd yet, of course...
NAIMThese are countries -- many of these petrol states, they are countries that are heavily dependent on hydrocarbon exports, you know, where the only game in town for the economy is, you know, drilling and selling oil and gas.
LAKSHMANANSo you're thinking Venezuela, Ecuador, Nigeria…
NAIMRussia has had a huge drop in their -- in the ruble, in the value of the ruble. They -- last year, they had a 10 percent cut. They are cutting public spending. And that is creating ripples throughout their economy and society.
LAKSHMANANHmm. Well, you know, to your point about how one of the losers is the environment, I'm struck because, of course, there was so much momentum that built up in Paris after the Paris talks about trying to keep carbon emissions in check and setting targets internationally. And, you know, I'm wondering now whether all of that is now going to be lost, given that the oil price is so low that there's less incentive to work on renewable technology.
NAIMI surely hope that some of what was agreed in Paris is going to stick and is going to be implemented. And I think we should, for everyone, should try hard to make changes there. One of the sad missed opportunities of these very low oil prices is that countries are not ready politically to take advantage and impose some carbon pricing. Meaning, just for example, an increase in taxes, in energy taxes, in gasoline prices. People -- consumers are likely not to notice, if you -- with prices so low, you increase for a few cents the gallon -- per gallon, you know, the impact is not going to be felt throughout the economy in very significant ways.
NAIMAnd it can have massive, major consequences for how oil is consumed, gasoline is consumed in this country and for the environment. Unfortunately, sadly, that is going to be a missed opportunity. We are at a wonderful moment to take advantage of this possibility. But we will not.
LAKSHMANANWell, it looks like one of our listeners, Kathleen in Virginia, agrees with you. She says, "when computers were first introduced, people thought many jobs would be lost. They were correct. However, countless more work opportunities were created. So rather than supporting dinosaur technologies, won't the same thing happen if we were to develop alternative fuels and new technologies?"
BOOKWell, I think the problem that is attempted to be solved by an agreement like the one in Paris is one that has many solutions. And transportation is one of the areas where hydrocarbons are probably going to be the last man standing in the hydrocarbon portfolio. If you think about it, oil is sort of the Goldilocks of the hydrocarbons. Coal is messy. Natural gas requires a lot of infrastructure to move around, freeze, warm back up and use. But oil is stable at atmospheric pressures and temperatures.
LAKSHMANANSo it's the just right.
BOOKIt's kind of the just right. And it also turns out that if you look at how end-users experience electric vehicles -- the end-user experience of electric vehicles is exactly the same, except for them being cooler and more socially acceptable in the coastal cities than petroleum-fueled vehicles. If you look at the end-user experience of a pocket calculator versus a modern computer, there's no comparison. So what you really need is a different end-user experience. It's probably a deeper topic and more philosophical than your listener wanted.
BOOKBut what I would suggest is that it doesn't compete necessarily on price or anything else right now, so it's a long way off.
LAKSHMANANGillian Tett, how do you see the effect of low oil prices on the impact of renewables and a momentum to limit carbon emissions?
TETTWell, it's clearly taken the sense of urgency off the table a bit. And I would completely agree with Moises that this is a tragedy. Because there needs to be some action. There is some sign of political impetus towards trying to deal with climate change. There are some amazing technology breakthroughs on the table. But what is missing right now is the economic incentive, or rather the economic imperative.
LAKSHMANANAll right. Let's go to the calls. Our number is 1-800-433-8850. You can call us or you can also send us an email to firstname.lastname@example.org. Or send us a message on Facebook or Twitter. Let's go to Larry in Evansville, Ind. Larry, you're on the air.
LARRYHi. Thank you for taking my call.
LAKSHMANANThank you for calling.
LARRYMy concern is with oil -- I mean, gas prices, they finally have leveled off down to a tolerable rate, which I believe is in line with interest. The problem is, the motor oil, petroleum, lubricants, greases, different items of that nature are still extremely inflated at three times or better, they're high. And I'm a mechanic. I've used these products for years. And prior to the Iraq War, we were paying $0.89 to $1.29 for a quart of oil. Now it's hovering between $5.49 and $8.00 a quart. Why hasn't the cost of that leveled off? Are they just taking advantage of it to coffer their, you know, fill their coffers full of that instead of oil at this time?
LAKSHMANANAll right. Good question from Larry about fuel byproducts. Does anyone have the answer?
BOOKThe answer for Larry probably has more to do with refineries that use oil and turn them into useful products than crude oil itself. The crude oil supply does directly map to the gasoline price. But how much gasoline a refinery makes out of a given barrel of crude oil is a function of configuration and also how much that product maps to other things that you can get out of the barrel. Lubricants, including synthetic lubricants, are expensive to make. Also, pollution standards and requirements to come up with cleaner products have increased the costs. But to be clear, we're trying to maximize our output of transportation fuels from our refining fleet right now based on the oil that we have and that doesn't necessarily optimize low-cost lubricants in the process.
LAKSHMANANHmm. All right, well, Gillian, can we go back to just some basics here. And I think, you know, this will speak to some of the callers we have, which is, explain the relationship between oil prices and gasoline prices. We have a caller, Chaz, who points out that at the pump he has definitely not seen a 70 percent drop.
TETTWell, the relationship between oil prices and gas prices is intermediated by business, by companies, by all series of profit-seeking distributors, producers and gas operators or gas station operators. And like any other business, they take a cut. They don't have an incentive necessarily to always pass prices on to consumers. And then you have tax as well. So unfortunately, as in any business sector, the fact that the prices are dropping at one end doesn't (unintelligible) to automatic big price drops at the other end.
LAKSHMANANIt doesn't translate into automatic price drops. That was Gillian Tett. I'm Indira Lakshmanan and you're listening to "The Diane Rehm Show." So, Moises, I want to go back to this question about why low oil prices are not translating into bigger demand, both here in the U.S. or in China, which has been the biggest oil importer in recent years?
NAIMTapping the demand is tapping the economy. The economies are either not growing and declining or growing at a lower speed, like it's happening in China. Or very -- is a very anemic growth, as the one we are seeing in the United States. Then you also have, in some areas, some efficiency gains. It takes a long time for them obtain and have an impact. But we are seeing a little be of that. But mostly is, it has to do with the fact that we are living in a world that is not very dynamic in terms of the economy.
NAIMAnd emerging market, and especially China, has lowered its imports of oil, and because it's growing at a much slower pace.
LAKSHMANANAll right. Kevin Book, let's bring it back home. There are states in the U.S. here that are really suffering as a result of these low oil prices. Which ones are more affected than others?
BOOKWell, the states that have the most impact are the ones with the least diversified economies and the greatest reliance on oil. And I can think of no state that, in that context, suffers more than either Alaska or North Dakota. You know, and Alaska has had to look at potentially introducing income taxes, something that is the opposite of how life in Alaska has been experienced since oil wealth is paid into a permanent fund.
BOOKFor North Dakota, the transformation that came from shale production and all that came to the economy in spillover and multiplier effects -- it work -- that multiplier works in reverse. In more diversified producing states, like Texas and California, the impact of low prices is less because those are robust economies that have other things going for them.
NAIMYeah. That's a very good point that Kevin makes. And Texas is a fascinating example. All oil and tax revenues in Texas are down 50 percent from last year. Energy companies are laying off people and employees. And the state universities are watching their oil-dependent endowments shrink. Yet, the economy is expanding. Texas is -- 9 of the 11 major industries in Texas are showing job growth. Texas has the third highest employment growth rate in the United States. And the essence of this story is what Kevin said, these are states that have diversified from a strong fiscal dependence on oil and gas. And now they can manage this volatility of oil prices in a much better way, a more effective way, without hurting.
LAKSHMANANSmart to diversify, as opposed to North Dakota, where you see these towns that have popped up out of nowhere and huge, high prices when fracking was at a high. And now, as you say, Kevin, they're experiencing that in reverse.
NAIMAnd that's exactly right. And Louisiana is a very good example. In 1980, Louisiana depended -- 40 percent of its budget depended on oil and gas. Now, it's 13 percent. So Louisiana managed to diversify its economy too. So that's an interesting aspect of the winners and losers and how to manage this situation.
LAKSHMANANOkay. We're going to take a very quick call before we go to break. We've got Jed in Sumner, Ill. Jed, go ahead.
JEDYeah. I just wanted to make two comments. One, whenever you hear about the price of oil and the stock market, the local producers actually make $6 to $7 less than that price. So if oil is $30 a barrel, that means they're making about $23 or $24. Because they have to sell the oil to someplace like CountryMark or someone like that and then sell it to the refineries or they have their own refineries.
JEDAnd then also, I wanted to make a point that each oil well creates -- I don't even know how many jobs it creates, because you have the people who drill the well, then you have the people who complete the well, then you have the pumps that you put in the bottom of the well, then you have all of the parts that all these different manufacturing companies that are made for each one of these pieces of the well, then you also have a pumper that you have to pay to check on this well every day. (unintelligible)
LAKSHMANANWell, it sounds like you work in an oilfield yourself.
JEDYes, actually I -- yeah. Yeah, I'm actually, I work for JB Oilfield. We specialize in bottom-hole pump. (unintelligible)
LAKSHMANANAll right. So you're describing a lot of downstream benefits from the oil industry. Obviously, that fall in oil prices is hurting people like Jed and his business.
BOOKJed's right on both counts. When you walk back from the wellhead to the actual place where the oil is sold, there is an increment in price. And it goes further until you get to the actual benchmark price that we all see on TV screens, the West Texas Intermediate Price. And these are very big, high-multiple jobs. And that's why the economy benefited so much from the boom.
LAKSHMANANAll right. We're going to take a short break. And when we're back, we'll be talking more about low oil prices, the effect on geopolitics, economics and the environment. Stay with us.
LAKSHMANANWelcome back. I'm Indira Lakshmanan, sitting in for Diane Rehm. This hour, we're talking about low oil prices, what causes them and their effect, with Moises Naim, distinguished fellow at the Carnegie Endowment for International Peace, Kevin Book, managing director of research at ClearView Energy Partners, and Gillian Tett, US managing editor at the Financial Times newspaper.
LAKSHMANANAll right, well, some of our listeners are writing in, and they have very strong opinions. Jamie in Texas, of course a heartland of U.S. oil industry, says, "I have zero sympathy for failing oil companies in the face of falling oil prices. They were all too happy to cash in while prices were high, and now that they've helped crash the stock market, natural selection should decide who survives. To the extent that a national economic crisis might occur, I believe our government's enabling policies towards fossil fuels should be reconsidered." Kevin?
BOOKNobody loves banks or gas stations, but they need them.
LAKSHMANANOr oil companies.
BOOKOr oil companies, that's right. So, you know, I don't -- I don't think there's a lot of people necessarily who are going to say, oh, those poor oil companies.
LAKSHMANANI mean, they were minting money a few years ago.
BOOKAnd they were losing money before that and minting and losing, and that's been really the way things have gone since the start of the industry. The reason to care is because energy independence, such as it is, or less dependence on imports, has a value. Domestic production and the jobs it creates has a value. There's reasons to want that even if you aren't particularly fond of oil companies.
LAKSHMANANAll right, well, Gillian Tett, last week we learned that two of the biggest oil and gas drillers may actually go bankrupt. Will they, and what effect would it have on the U.S. economy? Are we going back to another recession?
TETTWell, I'm not going to -- I'm not going to predict any particular bankruptcies, but you can see from the movements in the price of the markets how people -- investors are evaluating these companies, and they're very worried. What's actually more surprising is that more companies haven't gone bust in the last six months. That really reflects the fact that borrowing costs are so ultra-low and so cheap.
TETTAnd the central banks have been flooding the global system with money. If interest rates had been higher, you would have seen a lot more pain already. But one important thing to stress is that as companies in the energy sector do go bust or suffer, it's not necessarily the banks that are hurting this time around. It's going to be investors who are holding their bonds because a lot of the risk has been actually distributed across the system into mutual funds and to pension funds, and that means that many pensioners, many investors, could be affected in subtle ways they may not yet understand.
LAKSHMANANSo you're talking, Gillian, not just about big investors, people who are playing the stock market, but actually institutional investors, people who are holding their 401 (k) s that may be invested in many of these companies because they were such a good deal a couple years ago.
TETTAnybody who has a 401 (k) probably has some exposure tucked in there somewhere to risky energy companies, and the reality is that as those start to suffer, anyone holding a 401 (k) investments will see a bit of a hit, as well.
LAKSHMANANAll right, well Mario, one of our listeners, says, "how likely is it that the previously higher oil prices were actually over-inflated artificially, like home values before the recession? I point to the many years of record-breaking profits during the stretch of years with higher prices."
NAIMI'm happy to address that from a really sort of bland historical perspective and then a somewhat more fiery one. Since 1859, the real price of crude oil is about $35 on average. If you go back about the last 20 years, that average rises to about $65. Anyone who thought $100 was the new normal hasn't looked at history and probably hasn't thought about the oil market very deeply. On the other hand, the volatility that you're seeing reflects changes in the access to supply that we have.
TETTAs it's gotten harder to find big fields, as it's become more expensive to develop new technologies, you need high prices to signal to the market to produce resources that wouldn't have come to market before, just like shale. So what you have, like it or not, is a volatile but arguably well-functioning market.
LAKSHMANANAll right, well then, then, Kevin, how worried should we be about the debt of U.S. oil and gas producers? Is it going to bring the rest of us down?
BOOKWell, I think we should always be worried when a major sector of the economy is exposed. On a GDP basis, oil and gas is about 1.25 percent of GDP at the upstream, but there's a lot of derivative and supporting services. That's always going to be a factor. The broad institutional holding, as Gillian mentioned, of debt and of the notes that are financing these companies, some of which are probably very much more underwater than we realize, but they haven't been called out on it yet, that's also a cause for concern. I wouldn't want to diminish it, but it is just part of a big economy.
LAKSHMANANAll right, and Bob in Oklahoma, says, "where have you people been? Low oil prices have severely damaged the whole economy of Oklahoma, a considerable loss in educational funding, so well as health care funding, as a result of falling oil prices." So some sad, sad news from Bob there in Oklahoma. All right, let's go to this call from Daniel in Falls Church, Virginia. Daniel, you're on the air.
DANIELHi, Indira, how are you all this afternoon?
LAKSHMANANI'm very well, thank you.
DANIELGlad to hear it. So you've been talking kind of on and off about winners and losers from the drop in oil prices. But what is it exactly that seems to fuel this very large lag in our political reactions, and even on an industrial level, reactions to the change in prices? If you look at OPEC countries, they had a massive glut of revenue for a very sustained period of time. That money didn't go to infrastructure, it didn't go to improving labor conditions, it didn't really go past anything but the owners on an industrial level.
DANIELAdditionally, now that we have a massive discount stateside, we aren't introducing a gas tax to try and rebuild our infrastructure. We aren't utilizing a tax to increase R&D subsidies for green-tech companies. And even you were mentioning -- your guest was mentioning briefly before that, we didn't like gas companies, and we have to basically deal with their sore spots and when they're doing particularly well.
DANIELBut they could've have used the glut of revenue to diversify their offerings and basically make -- invest in an R&D to try and create tech that would've sustained them through these shorter periods of -- these lower -- these declines in pricing.
LAKSHMANANAll right, thank you very much, Daniel. Moises, he's speaking very directly to something you spoke about earlier, which is the ability to use low prices to create subsidies for green technology or taxes.
NAIMOne of the world's largest subsidy is the subsidy to oil and gas and gasoline. The IMF, the International Monetary Fund, has estimated that it's, per year, is $540 billion that governments use to subsidize oil consumptions, gasoline consumption. That could have been used to -- for other means. These are highly regressive subsidies, meaning that they help the rich more than the poor.
NAIMThere's a study that shows that in North Africa, as much as 60 or even 80 percent of what the government spends to subsidize energy benefits the rich, the richest 20 percent, and the poor are receiving less than 10 percent of these public funds. But the good news is that things are happening. In some countries, they are tackling these subsidies and cutting them. From Oman and Indonesia, India, Malaysia, even Venezuela has raised its price of gasoline.
NAIMSo in some countries, governments are willing to take on these subsidies. There is still lots more that needs to be done and especially in the United States. So Daniel is right that in the United States, there's a hyper-sensitivity to these prices and to intervene in these markets.
LAKSHMANANAll right, Gillian, I don't think we can have any one-hour-long conversation about oil without talking about Iran. They of course have just come out from under three-and-a-half years of punishing U.S. and European oil sanctions. The nuclear deal means that they can now start ramping up their production and their exports again, but due to cheap oil prices, they're not going to be making even a fraction of the revenue that they were earning before sanctions. So what is the outlook for Iran?
TETTWell, clearly for Iran this is a gift, which was given to them this year, which has turned rather sour because they were very hopeful that this would allow them to start selling the oil on global markets and actually boosting revenues, and the Iranian government is under pressure, fiscally. It hasn't turned out that way, and I don't think anybody is expecting to see the oil prices rocket up again anytime soon in a way that's going to bring the government of Tehran a lot of relief.
LAKSHMANANAll right, it's also clear that they're not wanting to keep their production down because they've been, you know, keeping a lot of oil on tankers, floating it around. But at the same time, as you say, it doesn't look like they're going to be benefitting from it too much economically. Kevin, what about Libya? Secretary of State Kerry warned lawmakers here last week that that country could become a failed state. Is the oil glut hurting them on top of their political problems?
BOOKIronically Libya has much more potential to hurt the oil glut. Right now Libya is producing about one-fifth of its pre-revolution output. Were Libya to suddenly regain its political footing and arrive at something like stability, the volume that could arrive on the market, 600 to 1,000 to a million barrels per day could absolutely crush prices. Ironically also, Libya's sort of unique, perhaps it is unique, in the sense that without a really firm in-place government, oil production has still continued at all.
BOOKUsually the folks in charge like to produce oil because it funds the country, in this case even when there's not always someone in charge, oil has continued flowing.
LAKSHMANANAll right, and Moises, I can't round this out. It's got to be a trio here. I've got to ask about Russia, huge petro state. Their economy is so dependent on oil and gas. How are they responding?
NAIMAs I said before, they are hurting. They are cutting budgets. The ruble has been devalued, inflation is up, and they're frying. And they are being hit by a double-whammy both of lowering -- low oil prices but also sanctions as a result of their intervention in Crimea and Ukraine, the European Union and the United States has imposed economic sanctions in Russia that are biting. And so, you know, Russia is -- you know, has a weak and weakening economy.
LAKSHMANANSo we can't forget that some of the countries that are suffering from low oil prices, Iran, Venezuela, Russia, these are not friends of the United States. So although I don't think the United States is going around wishing that there are low oil prices that hurt the global economy, certainly there must be some corners, diplomatic corridors in the State Department, where people are commenting to themselves, gee, this is at least hurting some of our big rivals out there on the international scene, weakening them.
NAIMMarty Wolf, one of Gillian's colleagues at the Financial Times, said, you know, it couldn't happen to nicest people. And we're talking of course Vladimir Putin, and we're talking first, Hugo Chavez, and now his successor Nicolás Maduro in Venezuela. So yes, the geopolitical consequences of lower oil prices are having very important and surprising effects in a lot of these countries that have long-standing frictions with the United States.
LAKSHMANANSo there could be some upside for U.S. foreign policy possible. I'm Indira Lakshmanan, and you're listening to the Diane Rehm Show. All right, let's take a quick call from Guy in Brookshire, Texas. Guy, you're on the air.
GUYYes, can you hear me?
LAKSHMANANYes, go ahead.
GUYYes, there was a caller, oh, two or three calls behind, back, that was speaking of how, you know, we keep hearing about how the downstream economic benefits of oil and oil producers, you know, creates all these jobs throughout the local economies. But what if I called up to you, and I said, well, you know, the drug trade is a wonderful thing because it creates all kinds of jobs, all of that money goes back into the economy, would you not think that I had just lost my mind?
GUYI mean, you know, you know, we don't try to save the drug trade because it brings all kinds of money into the economies downstream because it destroys lives. And it's the same thing, analogous to that, is oil. I mean, there's -- nobody can say that oil is a good thing for the environment. It destroys the environment.
LAKSHMANANOkay, thank you, Guy. So Guy's making the point that oil is a drug, the U.S. depends on it, and it harms the environment.
BOOKI've suggested in testimony before Congress that addiction is the wrong metaphor. Oil is the oxygen that nourishes industrial societies, industrial economies. If you have somebody who's short of breath, maybe they need to lose weight, you need to be more efficient with oil, use it more careful, lower your carbon intensity, but I don't think you can call it a drug. It has strong economic benefit.
LAKSHMANANMoises, any alternate viewpoint?
NAIMYes, and that's true, there is no doubt, but there is no doubt that the caller is correct that oil consumption hurts the environment, and if we can do less of that, it would be better.
LAKSHMANANGillian, what are some of the long-term effects that you predict from this global oil glut, and how long do you see it continuing?
TETTWell, I think perhaps the single biggest effect will be geopolitical in the sense that OPEC has operated a tight cartel now for a couple of decades that is breaking down in a very profound way. The U.S. has been forced into all kinds of sometimes unsavory alliances in the Middle East to guarantee its oil supply, as have other countries. That is now no longer necessary. And so you're seeing a very significant shift in the power balance. You're also seeing a potential shift in the profitability or competitiveness of businesses.
TETTThe U.S. has enjoyed a big boost to competitiveness as a result of lower energy prices. The Europe has not enjoyed quite such the same boost, and it's going to be interesting to see whether that changes going forward. But a rebalancing of the world order, of geopolitics, is by far and away the biggest and some might argue the most unexpected result of what's happened in the last couple years.
LAKSHMANANAll right, Kevin Book, I have to ask you, I read one study predicting that oil prices could fall to $0 a barrel, something that is pretty hard to imagine, especially if you lived through the 1970s and lines and rationing at gas stations. How is $0-a-barrel oil even possible?
BOOKIt's actually possible to have a negative price for energy. If you have too much, and you can't put it anywhere, you might pay someone to take it away. It's not very likely to happen for oil. There are places in market dislocations where you can't find a way to sell it, where you might see a low price, you might see single-digit price, you might even see briefly a negative price.
BOOKIf it touches zero in any of those places, it won't stay there long. This is a moment in time, Indira, where the oil industry is actually thinking some of the same things that environmentalists are but not for the same reason. They want to keep it in the ground, but they want to take it out again later, when the price is higher.
LAKSHMANANWhen the price is higher. All right, Moises Naim, give us your final thoughts. Will oil prices recover? If so, to what levels? And good or bad?
NAIMThat's an unfair question. (laugh)
LAKSHMANANSorry, then just tell us good or bad if oil prices...
NAIMPredicting oil prices is a fool's errand, and, you know, the safest thing to say is they're going to be volatile. But it looks like we're going to see a little bit, at least for the next 18 months, we're not going to see oil over $40, $50, $40, $40 to $45 is I think the consensus in the industry.
LAKSHMANANAnd in summary, do you think it's going to be overall a net negative for the economy, or do you think consumers are going to be getting enough benefit from the lower oil price to make up for that?
NAIMAbsolutely. There is a massive transfer of wealth from oil-producing countries to oil-consuming countries. But as we discussed today, there is -- it's a mixed bag. It's very hard to just have a one-liner that says net. It depends where, it depends what are your assumptions about how long, it depends on how this -- the benefits are distributed. And so, you know, the conversation has pointed out to the complexity of calling a net effect of lower oil.
NAIMBut the central message is that it is as complicated and troubling, perhaps, as a quadrupling of oil prices. So oil at $20 may be as destabilizing for the world as oil at $150.
LAKSHMANANAll right, that's Moises Naim, distinguished fellow at the Carnegie Endowment for International Peace. Also joining us this hour, Kevin Book managing of ClearView Energy Partners and Gillian Tett of the Financial Times. Thank you all so much for joining me, and thank you to our listeners for being here. I'm Indira Lakshmanan, sitting in for Diane Rehm.
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