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Falling Oil Prices Are Mostly Bad News

2014 November 5
by Ian Welsh

Yes, it’s nice to play less for gasoline and heating fuel, but while some of the decline in oil prices are a result of the new unconventional oil supplies which have come on line, much of it is that the world is going into recession—demand is down from every major economy.  That’s not good.

Yesterdays’ post showed what happened in the US job market over the last 6 years.  It never recovered for most people.  Remember, in terms of business cycle that was the recovery and the boom.  Those were the good times.

As for oil, the drops are to many conventional oil producers advantage if they can sweat them out. Much of the unconventional oil which came online is not viable below $80/barrel. The viability numbers you see for countries like Saudi Arabia are not their profit break even numbers, pumping Saudi oil costs less than $10 a barrel, rather they are what the Saudi government budget needs.  But the Saudis can handle a few years making less if it send their competitors into bankruptcy.

Remember that in the late 90s oil was under $20 a barrel.  I would want to see oil under $40 a barrel, with excess supply, to expect an economy as good as the late 90s one was.  Remember also that this is not the first time this “run a shitty economy until new sources of oil come on line” play has been tried—while the details were different, this is exactly what Carter, Reagan and the Fed of the late 70s and early 80s did. Temporize waiting for the new oil supply.

But while new oil did eventually come online, notice also that the economy never really got good ever again: you have about 4 good years in the late 90s and the rest is crap (again, for ordinary people.  The wealthy did very well).

Finally, those fools in places like Canada (my home and native land) who thought the good times would never end and that letting the mixed economy (aka. manufacturing) die, are about to reap the whirlwind.

All Commodity Booms End.  No exceptions.  Always.

Repeat that until it sinks in.

The old Canadian economy ran as follows: during times when commodity prices were high the Canadian dollar went up making our manufactured goods uncompetitive, but we used the money from selling commodities to subsidize manufacturing.  During times when commodity prices were low, the profits from manufacturing were used to subsidize the the resource producing areas of the country.

Harper, that feckless provincial incompetent and neo-liberal ideologue, has broken the Canadian mixed economy, which existed before him for over 100 years.  This is probably because he’s an economist, meaning he was indoctrinated to believe neo-liberal dogma.  Or perhaps he’s just a fool, hard to say.

The only Federal leader who understands the Canadian mixed economy is NDP leader Mulcair (Justin Trudeau, while has nice abs, is not very bright, unlike his father, who was a genius.)

It might not be too late to rebuild Canadian manufacturing during the oncoming recession.  My fellow Canadians, think carefully about who you vote for, especially those of you in Southern Ontario. Your housing values will not stay where they are if Canada’s entire economy is based on boom and bust commodity cycles and there are no jobs except in resource extraction, flipping burgers and finance.  Mulcair tried to warn you, years ago.

Learn.  Or reap the consequences.


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9 Responses
  1. November 5, 2014

    May I have another, sir?

  2. The Tragically Flip permalink
    November 5, 2014

    Yes, they somehow made Mulcair’s blatantly obvious and incontrovertable diagnosis of Dutch Disease into some kind of crazy left wing conspiracy theory.

    Being an ideologue is a good hypothesis for Harper, the alternative is he’s really just that cynical: propping up the oil boom was popular for him a route to his majority and he just didn’t care what comes next. Even more cynically: If Trudeau (or Mulcair) win in 2015 and the economy sucks, they’ll be blamed for it, rather than Harper. It could still work for the Conservatives for 2019.

  3. nihil obstet permalink
    November 5, 2014

    I think it’s on the good news side that low oil prices make fracking less attractive. That gives us time to develop alternative energy sources and maybe to stop the incredibly destructive practice.

  4. tsgbef permalink
    November 5, 2014

    The economics was always the excuse, but never the point. It’s always been about making sure that the Right People own the developing world’s capital base, rather than the Wrong People (ie, the locals.) If the entire 1st world’s middle class had to be pauperized to achieve it, so be it.

  5. JustPlainDave permalink
    November 5, 2014

    Not so sure. Looking at the longer term data, it’s clear that the economic role of manufacturing in Canada has been in decline during the most of the post-war period. There was some stabilization during the 80s and 90s, but prior it was quite a prolonged decline.

    The big winners in the most recent and more rapid decline (starting shortly before Harper took power) appear mainly to be the 5-series services (financial services, real estate, professional and tech services, etc.). Primary resources and mining, oil and gas extraction are basically flat (if not slightly down) over the same period.

  6. Lisa FOS permalink
    November 5, 2014

    We’ve done the exact same thing here in Australia. And it was planned.

    Read the papers from the Reserve Bank of Australia and the other economic sectors (manufacturing, tourism, etc) were supposed to ‘get out of the way’ of the mining boom.

    Mono economies, basically.

  7. Lisa FOS permalink
    November 6, 2014

    I should add that neo-liberals have been consistently anti-manufacturing. Every country they have got their teeth into has deindustrialised to a greater or lesser extent.

    There is only one reason for this that makes any sense, destroying well paying jobs. In their lexicon of beliefs, there can be no well paying jobs except in the professional classes.

  8. SRK permalink
    November 6, 2014

    It is always bad news. Falling oil prices or rising – consumer prices will still climb up slowly but surely over a longer time span or many more people will lose jobs or get less work hours, less money etc. But do notice one thing, those oil corporations owners will still be making profits like they had been before, thus increasing inequality not just in the monetary sense but also when it comes to rights, because in our economic system money buys you political rights.

  9. Lisa FOS permalink
    November 6, 2014

    Good background piece on Saudi Arabia’s motivations for killing the price of oil and the actual and potential impacts at Naked Capitalism. Looks like they are going ‘all in’ to take out competing oil producers and kick the crap out of Iran, Russia and the US, as well as damage renewables.

    http://www.nakedcapitalism.com/2014/11/saudi-cut-oil-price-us-may-lead-price-war.html

    Another economic war going on, got Japan going ‘all in’ on printing more money, US tightening and pulling money back there, sanctions on Russia and Saudi Arabia starting an oil war.

    What could possibly go wrong?

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