Give cheaper oil a chance

Beyond the economic case for ending America’s ban on exporting crude is a geopolitical one, writes Jason Kirby



Let’s pretend for a moment you could pluck a fellow from the year 2003 and transport him to the present. Oh, the things that would blow his mind: a black American president. An electric car company on track to be worth more than General Motors. U2 giving away an entire album for free.

But if you really wanted to toy with our time traveller’s noodle, you could just tell him the U.S. is debating the extent to which its vast oil resources could be harnessed to crush terrorists in Iraq and Syria.

Never mind going back to 2003. As recently as 2008 America was still seen as dangerously dependent on the Middle East for oil. Then the U.S. energy revolution, driven by a boom in shale oil drilling, got under way. Since then U.S. oil production has surged by four million barrels a day. Sometime in the next year or so, the U.S. will surpass Saudi Arabia to become the world’s top oil producer. Meanwhile, America’s oil imports next year will fall to the level they were at in 1968, the year of the Tet offensive and the Beatles’ The White Album.

This bounty of oil has triggered calls from many sides for America to lift a ban on export crude that has existed since the 1973 Arab oil embargo. Those opposed to lifting the ban argue it’s necessary in order to keep gasoline prices in check. On the other hand, the argument goes, getting rid of export restrictions would lead to greater supply in world oil markets, thereby pushing down crude prices and by extension prices at the pump—not to mention the added benefit of boosting America’s energy sector and creating jobs. A report released earlier this month by the Brookings Institution argued that gasoline prices would fall by between two to 12 cents (all prices in US$) per gallon on average. “Lifting the export ban would remove an artificial barrier to crude-oil production,” the study concluded. “The result would be lower crude-oil prices worldwide.”

But an interesting secondary argument has begun to take shape. Beyond the economic case for ending the ban is a geopolitical one—lower oil prices could deliver a serious blow to Islamic State, the terrorist group once known as ISIS, as well as Russia’s energy-dependent economy and other nations threatening global stability. To put it in overly simplistic terms, if you want world peace, you want oil prices to fall.

For its part, Islamic State runs on black-market oil. It’s estimated the terror group generates $2 million a day from the sale of illicit crude, passed through smugglers and brokers in exchange for cash, weapons and other supplies. At the same time Russia derives close to half its budget from oil exports. This week the Russian central bank warned the economy would “slow down significantly” if oil prices don’t rise soon.

How much would prices drop if the export ban were lifted? Estimates are all over the place. Writing in the New York Times, Thomas Friedman mused about prices falling by between $15 and $25 a barrel. Many people got a chuckle out of that, the way many of Friedman’s pronouncements get laughed off. But then at a speech for the release of the Brookings report, Larry Summers, the former economic adviser to President Barack Obama, gave added weight to the idea that lifting the export ban could cripple America’s foes. He doesn’t see a price drop of the scale envisioned by Friedman, more like $5 to $10. But the effect would be the same, he said. “If [the oil money flowing to Islamic State] fell by five per cent would it be a better world or a worse world? I think it would be a better world. A five per cent reduction in the price of oil would take some number in the US$10 billion range away from Iran. Would that be a better world or a worse world? I think it would be a better world.”

As it stands, long-term weakness in oil prices is already starting to show. It’s not just that crude prices have dropped 15 per cent over the last year. It’s that they’re as low as they are—below $100 a barrel—given all the awful things going on in the world. Oil traders being a skittish lot, petroleum prices have not traditionally responded well to uncertainty. Yet today you can pick your poison. Islamic State has seized control of several oil fields and refineries. Russian President Vladimir Putin’s aggressive takeover of parts of Ukraine shows no sign of letting up. The deadly Ebola virus is spreading quickly through West Africa and threatens to shut down parts of Nigeria’s oil industry. Then there was that little matter of Scottish independence and its effect on North Sea oil production. Despite all this strife, global oil prices have gone nowhere but down.

The surge in U.S. oil production is the big reason why. So is Canada’s massive output from the oil sands, despite the challenges of getting the stuff out of the country. Mexico is liberalizing its energy sector. Each month seems to bring new and bigger discoveries—last month an Australian offshore oil rig made what has been touted as that country’s largest discovery in 30 years. Add in a slowdown in China’s economy that looks set to drag on, and a dramatic shift in America’s energy consumption from oil to natural gas, and it should surprise no one if oil prices continue to fall.

How that plays out for Canada’s energy-dependent economy is another debate. But if slumping oil prices lead to a little world peace, who can complain?


Give cheaper oil a chance

  1. The oilsands, according to Statistics Canada, account for only 2 per cent of the national GDP.

    • Statistics Canada is 100% pure BS. They quote inflation as 2.1% but money devalued 10%….

      Sad to say, but the truth is Statistics Canada has become a BS for politics and deception. Here is one, they claim GDP grew 2%, and in terms of CAD money it did. But in terms of Yuan, USD the largest world currencies we devalued 10% over the last year for a negative, shrinking economy in world terms.

      I know, all the money I put offshore in USD is worth 10% more before gains and dividends, even dividends are 10% more in terms of CAD, sure beats crappy value losing Canadian investments. Carney knew when to leave to avoid depreciating money Canada.

    • And that has absolutely nothing to do with the article you, supposedly, just read.

  2. I agree that cheaper oil/gas can result in a cheap peace, but so far, tell that to the Oil Corps and their shareholders,…
    Our oilsanads are supposed to be the one of the largest oil repositories in the world, 2nd to Saudi-Arabia,…, or so they I’ve read about for years now.
    However, I’m still waiting to see these advantages at the gas pumps, instead, price/litre has gone even higher ?!

    “An electric car company on track to be worth more than General Motors.”
    from 2003 -> 2014 Every major city in North America should be driving EV’s, as the majority of inner-city commuter vehicles by now, but that too has also NOT happened, or, the prices are too ridiculously high – aka Tesla ?

    America will need another FDR, and we will need another Trudeau,
    if you wanna see cheap gas, with peace in our time.

  3. Impact of the oil sands on Canada’s gross domestic product

    With growing production from the oil sands, the Canadian Energy Research Institute (CERI) estimates that the value of bitumen and synthetic crude oil produced over the 2000-2020 period could total over $500 billion.4 CERI estimates that oil sands and oil sands-related activities together could, according to their model, contribute some $789 billion to Canada’s gross domestic product (GDP) over the study period (2000‑2020). While the majority of the economic benefits associated with the oil sands will be felt in Alberta, CERI believes that Ontario could also see a $102 billion boost to its economy over the 2000-2020 period, while the GDP impact of oil sands and oil sands-related activities on other Canadian provinces and territories is estimated at $53 billion dollars over the same period. Provinces other than Alberta are affected by the oil sands mainly because “Even though the resource is located in Alberta, the goods and services and equipment are coming from all over Canada.”5 CERI’s analysis shows that outside of the crude oil and oil sands sector it is the finance, insurance, real estate, and manufacturing industries in places like Alberta and Ontario which stand to benefit the most from the development of the oil sands. Indeed oil sands projects are stimulating demand not only in Alberta but throughout Canada and beyond for business services, banking and insurance services, steel, vehicles and manufactured equipment and components. Nationally, CERI estimates that oil sands and oil sands-related activities will account for about 3% of Canada’s GDP by 2020, up from about 1.5% in 2000.

  4. You just made a case to dump CAD currency and seek out Yuan and USD.

    As oil/energy is the only reason Canada is economically viable beyond wheat/food production. But even though our beef production was 50%+ exported at one time, its dwindled to below 12% as we are a tax inflated depreciating economy of debt.

    If oil goes to say $75/barrel, so will the CAD drop and hyper inflation will murder the middle class.

  5. US oil is relatively expensive, US energy business has peeked if oil prices fall as much new oil costs $90 and up to be viable.

    Lower prices may be good for some, but for Canada its a disaster. Less jobs, less taxes, less balance of trade, be ready for the 50 cent loonie and 100% inflation.

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