“It may be taken for granted that, rash as the Americans are, when they are prudent there is good reason for it.”
— Jules Verne, Around the World in Eighty Days
Who wins and who loses from the drop in the price of oil? That is a complex question, one which we will continue to explore on The Domino Principle for some time to come. Today we take a look at it from a broad geographic perspective, examining which areas around the world win or lose overall, heavily referencing 13 articles I’ve found which address the topic in great depth. In each case I provide the link to the source material for a fuller explanation.
Here in Houston, the situation is complex indeed. On the whole, consumers win from the drop in the price of oil, seeing their costs of commuting and travel drop significantly. The larger petroleum companies centered around central Houston, which focus on drilling for new oil, lose significantly, as the drop in the price of oil makes some types of exploration and drilling uneconomical. But gas stations and the substantial petrochemical industries in the Pasadena and Texas City areas benefit from the drop in the price of oil, because as the price of their raw materials decreases, their operating margins increase and the demand for their products also increases as they are able to decrease the price to the end customer. And the state and local governments, which collects taxes in a wide variety of ways from oil related activities, likely come out as strong net losers.
This December 15, 2014 article and video from Chris Giles in the Financial Times “Winners and losers of oil price plunge” provides some good perspective and looks at effects on a country by country basis. It was written when oil as at around $60 per barrel (it is trading at about $52.50 as I write this posting).
Giles notes that:
“The plunge in oil prices now threatens Russia’s living standards and public finances to the point where it will start 2015 as a devalued and belligerent nation with nuclear weapons.”
“In normal times, the broad effects of the oil price drop on the global economy are well known. It should act as an international stimulus that will nevertheless redistribute heavily from oil producing countries to consumers and the longer the new prices endure, the more profound will be the effects on the structure of industries across the world.
But this time, economists are actively debating whether the world has changed and other moving parts — such as falling inflation levels and the strong dollar — will throw sand into the works of the usual economic relationships.”
“The scale of the global effect is significant. Oxford Economics estimates that every $20 fall in the oil price increases global growth by 0.4 per cent within two to three years”
This December 8, 2014 article from the Wall Street Journal Oil Price Winners and Losers Around the Globe contains a map of winners and losers around the world based on a $40/barrel drop in crude price, followed by searchable table that indicates the potential impact on countries’ gross domestic product around the world.
A January 8, 2015 article in SocialistWorker.org “Winners and losers in the global oil crash” focuses closely, not surprisingly, at the repercussions in Venezuela and Russia.
The December 19, 2014 article in the Washington Post explains Why low oil prices could be bad for some states. It shows that Alaska, Louisiana, New Mexico and North Dakota will be the US states hardest hit in terms of tax revenues.
This December 22, 2014 article from CNBC “Some states win, some states lose in oil shock” also looks at U.S. states most affected by the price drop.
A February 1, 2015 story on citifmonline.com “Winners and losers from the plunge in oil prices” notes that “The recent sharp drop oil prices represents a large transfer of wealth from producers of oil to consumers of oil — roughly $1.5 trillion, or 2% of world GDP” and that it provides an “$80 billion tax rebate equivalent for the United States.”
This extensive February 2015 white paper from BlackRock “Concentrated Gain, Widespread Pain: Dynamics of Lower Oil Prices” really dives deep at examining the factors leading to the drop in the price of oil, the prospects for recovery, and the global repercussions.
A December 21, 2014 article from Zero Hedge “‘Houston, You Have A Problem’ – Texas Is Headed For A Recession Due To Oil Crash, JPM Warns” focuses in on why Texas faces deep challenges in avoiding a recession, and it notes that:
“The ripple effects are everywhere. If you think about the role of oil in your life, it is not only the primary source of many of our fuels, but is also critical to our lubricants, chemicals, synthetic fibers, pharmaceuticals, plastics, and many other items we come into contact with every day. The industry supports almost 1.3 million jobs in manufacturing alone and is responsible for almost $1.2 trillion in annual gross domestic product. If you think about the law, accounting, and engineering firms that serve the industry, the pipe, drilling equipment, and other manufactured goods that it requires, and the large payrolls and their effects on consumer spending, you will begin to get a picture of the enormity of the industry.”
Also addressing Texas is a December 19, 2014 article from fuelfix.com “JPMorgan: Texas at risk of recession next year“, and a February 3, 2015 Voice of America story and video in “Oil Price Drop Has Mixed Effects on Texas,” which notes:
“The slowdown will also affect companies that make pipes and fittings for oil exploration and production, as well as trucking companies that supply sand and chemicals for hydraulic fracturing and many other small businesses that serve the energy industry.
But low oil prices are a stimulus to chemical producers that use hydrocarbons to make everything from solvents to fertilizer and plastics. Perdue said new chemical plant construction near Houston would keep many skilled workers employed.”
And Texas Monthly Magazine asks “how screwed is Texas right now” and reaches a contrary conclusion in a December 22, 2014 story “Three Reasons Not to Panic About Oil Prices.”
Finally, a January 12, 2015 posting from the Calgary Chamber “Winners and losers: Global oil edition” looks at implications in Canada and around the world, while this January 23, 2015 story from iPolitics “The bloom is off the boom: How Alberta blew it” explains why Alberta, Canada now faces a severe crisis while Norway is thriving, noting that “The laissez-faire approach to resource management in Alberta has been a fiscal disaster compared to what might have been.”
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–Cliff
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