OPEC is closing in on a deal to cut production, which will surely cause oil prices to rise. Oil is already almost back to $50 per barrel, so cuts of nearly 1 million barrels per day could boost prices well into the mid-$50s, even up towards $60 per barrel. That will provide a windfall to oil producers around the world and the sacrifice for OPEC members will be more than paid for by higher revenues. For example, Iraqi officials say that for every $1 increase in the price of a barrel of oil, their revenues jump by $1 billion per year.
As a result, the odds of rising crude oil prices are high. But while that could be welcomed by the industry, consumers might not be as excited to see cheap gasoline disappear. After all, U.S. motorists have enjoyed two years of incredibly cheap fuel. Will rising oil prices put a dent in already tepid U.S and global economic growth?
Perhaps not. As Bloomberg reported, Goldman Sachs wrote in a Nov. 22 research note that the global economy could benefit from higher oil prices. That conclusion may not be obvious, but here is the logic the investment bank lays out: Higher oil prices lead to a wave of capital that flows into major oil producing countries such as Saudi Arabia. Unable to use all the capital, Saudi Arabia sends the excess savings back into the global financial system. Banks then use that capital to lend. Interest rates also fall as the financial markets are more liquid. The end result is lower interest rates, more financial liquidity, higher asset values and ultimately greater consumer confidence. In short, higher oil prices could boost economic growth.
These conclusions echo those from a team of IMF economists from earlier this year. In March, the IMF said that the assumed connection between oil prices and GDP (falling oil prices will boost GDP as consumers have more money in their pockets) is not as solid as previously thought. Many analysts, including those at the IMF, once assumed that although oil producing countries such as Saudi Arabia would be damaged from low oil prices, the benefits to consuming countries would more than offset those losses, delivering net benefits to the global economy. Related: Japan Is Aggressively Buying Up Oil And Gas Around The World
But over the past two years a surprising trend emerged. Equity prices tended to move in tandem with oil prices; in the past we had grown accustomed to expect the reverse to be true (crude prices rise, stock markets fall). The positive correlation between financial markets and crude oil prices caught many by surprise.
The reason that this unexpected link occurred has to do with monetary policy. In the past, central banks including the U.S. Fed would respond to falling oil prices with a cut in interest rates, spurring economic growth. Now, with interest rates near zero, central banks have no firepower left. Falling oil prices is causing some deflationary pressure as a result (falling asset values), and the lack of an interest rate cut means that the real interest rate is actually higher, dampening growth. As a result, the IMF economists argue that the reverse will also be true: a rise in oil prices will push up asset prices, and if central banks hold off on interest rate increases, the effect could be positive for growth. Related: A Thanksgiving Tale: 50 Million Turkeys And A 5 Billion Mile Drive
While that explanation is convoluted and a little bit of a mouthful, Goldman Sachs' interpretation is much simpler: An integrated financial system means that savings from oil producing countries finds its way back to consumer countries, where it can stimulate growth. The investment bank singles out the early 2000s, in which rising asset prices and global growth came even as oil prices (and prices across a range of commodities) rose substantially. "The difference between today and the 1970s is that oil creates global liquidity through a far more sophisticated financial system," Goldman Sachs analysts wrote in their note to clients. "More sophisticated financial markets in the 2000s were able to transform this excess savings into greater global liquidity that increased asset values, lowered interest rates, and improved credit conditions that spanned the globe."
Goldman says that the surplus in savings outside the U.S. ballooned from $1 trillion to $7 trillion between 2001 and 2014, pushing up asset prices. Of course, that can also have a darker side - asset bubbles in commodities as well as housing also led to widespread financial ruin.
All in all, the research from Goldman Sachs suggests that, while it may not be obvious to individual consumers who see higher prices at the pump, there could be a boost to the global economy in the coming months if oil prices rise.
By Nick Cunningham of Oilprice.com
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Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. More
Comments
Goldman Sachs is more interested in avoiding losses on loans to marginal oil producers, plain and simple. Many who are going under with the lower oil prices. And rightly so. This is the kind of thing that happens when bad assumptions are made about future prices. And government manipulation of interest rates to lower than what a free market would have, makes some development look profitable, when it isn't.
The vast majority of people in the US are better off thanks to lower oil, gasoline and electricity prices, because oil producers are now actually competing against each other for market share. That's what happens in free markets.
The focus of our energy policy should be to break OPEC, not to reduce CO2 emissions by raising energy prices. OPEC and the Greens are in bed otherwise the Greens would support nuclear power with zero CO2 emissions.
The natural gas bonanza in the US can be used to displace coal, of which we have an abundant low cost supply, or to compete with oil in the transportation sector. It is obviously preferable for the US to reduce high cost, national security threatening oil imports than to leave coal in the ground. Converting natural gas to methanol for use in the transportation sector will cap the price of oil at about $50 per barrel.
The other problem is OPEC lowering the price of oil to put the competition out of business. This is standard practice for a cartel. The threat of lower prices, Saudi Arabia can pump oil at $5 per barrel, will hinder investment in alternative fuels. What is needed is a mechanism to protect investments made at high prices from OPEC price reductions targeting competitors. When OPEC raises prices and competitive investment comes into the market, we want to make sure that the OPEC market share loss is permanent.
This can be accomplished by the government in a revenue neutral manner. Suppose OPEC raised the price of oil to $70 per barrel by cutting production. This incentives investment in natural gas to methanol plants that are profitable at an oil price of $50. As more and more methanol plants are built, the price of oil starts falling back to $50 per barrel.
OPEC responds by producing lots of oil, pushing the price to $30 per barrel in the expectation that all the methanol plants will go bankrupt. Suppose at this point methanol was providing 20% of the transportation market. The methanol plants require a $20 per barrel subsidy in order to be profitable and remain in operation.
Suppose the govt imposed a tax of $4 per barrel to fund a methanol plant subsidy so that OPEC could not force the methanol plants out of business. Because only 1 of 5 barrels of oil comes from methanol (20% market share), there is 5 * $4 = $20 of subsidy available for every barrel of methanol produced. This subsidy would keep the methanol plants operational even if OPEC dropped the price of oil.
In this manner, OPEC would have no incentive to raise the price of oil above $50 per barrel because it results in permanent loss of market share. They would have no incentive to lower the price below $50 per barrel because they would just lose money with no increase in market share.
Consumers also benefit. Gas prices do not increase above $50 per barrel and if for some reason they fall below $50 to $30, consumers lose only $4 of the $20 per barrel decrease.
This makes a lot more sense that pursuing high energy prices in order to reduce CO2 emissions. 97% of the global climate computer models agree, the temperature data is wrong and must be adjusted upward to agree with the computer models.
Aramco benefits
Tesla benefits
Al Gore benefits
The Global Elite benefit (not enough room here to explain, but it is better than GS's BS)
The bottom line is that GS doesn't give a crap about Joe 6 pack or the USA, and they should have been disbanded years ago.
It is GS who needs higher oil prices, not the american economy. They are the reason america is addicted to oil, they simply kill all other options. There is a bed in Bernie Madoff's cell with Lloyd Blankfein name written on it, wauiting for its owner.