Bad news for the unions, but good news for the economy and taxpayers!
Most everyone is familiar with the fact that Congress passed and the President signed into law a $1.1 trillion omnibus spending bill. Included in the omnibus bill was an amendment known as the Multiemployer Pension Reform Act of 2014. Notice the word Multiemployer.
Multiemployer, or "Taft-Hartley," pension plans commonly are administered by labor unions on behalf of their members and funded by multiple employers in a given industry, subject to collective bargaining contracts with the union. This means the union doles out the money in the form of pensions. It gets its money to pay the pensions from the various companies, which hire union members. The amounts are determined by previous negotiation and contracts between the union and those companies, which employ union members. In addition, the union has control of all the pension funds, and if properly invested, supplies another source of income to the pension fund.
Over a period of time, it has been learned that for various reasons a number of unions have insufficient funds to continue paying previously specified pensions to retirees.
A complicating factor is the involvement of a previously established federal pension insurance fund, the Pension Benefit Guaranty Corp. (PBGC). The PBGC recently reported that its multiemployer insurance program was almost certain to become insolvent in 10 years. Of the 1,400 multiemployer plans nationwide, 200 plans covering a total of 1 million participants are at risk of termination. This is also a projection of insolvency of the PBGC, because it's payout on claims exceeds its receipts of insurance premiums. In 2013, the PBGC lost $8.3 billion and a staggering $42.4 billion this year. That loss is paid for by US taxpayers or increasing the national debt.
The basic problem was caused by union mishandling of pension funds. Unions explain that their shortage of funds to continue paying pensions indefinitely have resulted from bad market investment conditions for three consecutive years, from 2000 to 2002, followed by the Great Recession of 2008. Nothing is said about their opportunity to invest in government bonds during that period, the fact that they compensated their union executive executives extremely well, and spent lavishly on meetings, and lobbying.
However,those are probably only small factors. The big problem is based upon the fact that pensions are a manifestation of the old Ponzi scheme. In this case, the entrance of new union members, with their payments of dues and negotiation of pension benefits from their corporate employers, have been inadequate to cover the continuing costs of the previous retirees. Union membership has been falling.
The federal government has been intimately involved in private pension plans, including ERISA, which is a federal law that sets minimum standards for pension plans in private industry. Congress could not ignore the plight of the PBGC with its continuing plunge to disaster. Congress had the option of doing nothing, which would then force the PBGC to continue paying claims and increasing its debt. How long this could continue is speculative, since PBGC debt would be cumulative. It would either have to go to the House of Representatives for funding or take his chances on issuing bad checks.
Another option for Congress was a taxpayer bailout of the current and future PBGC debt and/or direct bailout to the unions involving multi employer plans. Either of these would be very unpalatable to the voting public.
Congress took the easiest way which was tp allow unions handling multi employer plans to cut benefits to retirees. This put the spotlight on the unions, rather than on Congress.
The good news for the US taxpayers is that is that there is no immediate bailout either to the PBGC or to the unions. The bad news for the unions is that the action of cutting pension benefits to previous retirees is a disincentive to any potential member to join a union. Another nail in the union coffin.
On a broader basis, we no longer need unions in the US. In the early days of the Industrial Revolution, labor acted individually rather than collectively. in addition, the labor force was nowhere nearly as educated as it is now. With those factors, large companies employing a large labor force took advantage of that force with low wages and difficult working conditions. Unions were necessary to put a stop to that.
However, economic conditions in the US have completely changed. Labor is now much more educated and has many more choices of job opportunities. An individual does not need to be involved with aunion to have his rights protected and continued opportunities for employment. Unions are basically a monopoly and disadvantageous to a consuming public, primarily because they lead to higher prices for products and services. As union membership has been falling, the monopoly aspect has become less significant, but it still exists to some degree.
We don't need unions and allowing the promised retirement benefits of union members to fall is a further step to union decline. In spite of the Washington Times implication that this was a sweet deal for the unions, I believe Congress did the right thing.
Wednesday, December 31, 2014
Monday, December 29, 2014
Eliminate the Federal Import Export Bank
We don't need the Export Import Bank. It's another manifestation of big federal government. In spite of a claim to the contrary, it competes with private banking, by offering better conditions to lenders at the expense of the taxpayer. Its charter was renewed in September for six months. We need to let it expire now.
Wikipedia has a nice write-up on the Export Import Bank.
The Export-Import Bank of the United States is the official export credit agency of the United States federal government . It was established in 1934 by a Franklin D Roosevelt executive order, and made an independent agency in the Executive branch by Congress in 1945, for the purposes of financing and insuring foreign purchases of United States goods for customers unable or unwilling to accept credit risk.
The Bank's first transaction was a $3.8 million loan to Cuba in 1935 for the purchase of U.S. silver ingots. Note that Cuba got the ingots, and we put up the money so that they could buy them. Nothing is said about whether we got the money back.
The Bank made various loans to Mexico, Central American and South American countries for the construction of the Pan-American highway. Nothing is said about whether we got the money back. While I am not generally opposed to infrastructure development, we might note that the Pan-American highway is now used to assist immigrant kids entering our southern border illegally. In the construction of the Pan-American highway, the Bank approved twenty credits to U.S. companies including Caterpillar, Koehring Co., Allis-Chalmers Manufacturing, The Galion Iron Works, and Thew Shovel to help build the highway. I'm not sure what that's about, but it appears that the Bank guaranteed those companies against loss as they sent equipment to the foreign project. The risk was the taxpayers'.
The rebuilding of Europe after World War II involved the Mashall Plan and the Bank. The Marshall plan basically involved a philosophy that everything that the US had destroyed in its bombing raids and other military activities would be rebuilt at no cost to the individual countries involved.
During that time, the Bank increased lending authority from $750 million to
$3.5 billion. How much of the total cost of rebuilding went to the US taxpayers through the Bank is conjectural.
In 1945 and 1946 credit was offered to France, Denmark, Norway, Belgium, the Netherlands, Turkey, Czechoslovakia, Finland, Italy, Ethiopia, Greece, Poland and Austria to purchase equipment, facilities, and services from the United States. The financing was designed to aid reconstruction of the nations and to repair their import and export capability through the purchase of new machinery, currency exchange, and improvements and repairs to infrastructure and transportation systems. Note that the bank gave any recipients money to improve their infrastructure and transportation at taxpayer risk. How much of any of these loans was repaid is not said.
The October 30 issue of C&E News said that Rep. Jeb Hensarling of Texas, who is Chairman of the House Financial Services Committee, is leading the drive to end the Bank. He and his associates argue that a government program that helps companies export products overseas distorts the free market. I agree. If a foreign buyer wants to buy American goods, and he does not have the money, he can obtain it from his own foreign banking facilities and/or get delayed payments from the American supplier. The latter should be a judgment of the American supplier and not look to the American taxpayers through the Bank for a guarantee.
Wikipedia has a nice write-up on the Export Import Bank.
The Export-Import Bank of the United States is the official export credit agency of the United States federal government . It was established in 1934 by a Franklin D Roosevelt executive order, and made an independent agency in the Executive branch by Congress in 1945, for the purposes of financing and insuring foreign purchases of United States goods for customers unable or unwilling to accept credit risk.
The Bank's first transaction was a $3.8 million loan to Cuba in 1935 for the purchase of U.S. silver ingots. Note that Cuba got the ingots, and we put up the money so that they could buy them. Nothing is said about whether we got the money back.
The Bank made various loans to Mexico, Central American and South American countries for the construction of the Pan-American highway. Nothing is said about whether we got the money back. While I am not generally opposed to infrastructure development, we might note that the Pan-American highway is now used to assist immigrant kids entering our southern border illegally. In the construction of the Pan-American highway, the Bank approved twenty credits to U.S. companies including Caterpillar, Koehring Co., Allis-Chalmers Manufacturing, The Galion Iron Works, and Thew Shovel to help build the highway. I'm not sure what that's about, but it appears that the Bank guaranteed those companies against loss as they sent equipment to the foreign project. The risk was the taxpayers'.
The rebuilding of Europe after World War II involved the Mashall Plan and the Bank. The Marshall plan basically involved a philosophy that everything that the US had destroyed in its bombing raids and other military activities would be rebuilt at no cost to the individual countries involved.
During that time, the Bank increased lending authority from $750 million to
$3.5 billion. How much of the total cost of rebuilding went to the US taxpayers through the Bank is conjectural.
In 1945 and 1946 credit was offered to France, Denmark, Norway, Belgium, the Netherlands, Turkey, Czechoslovakia, Finland, Italy, Ethiopia, Greece, Poland and Austria to purchase equipment, facilities, and services from the United States. The financing was designed to aid reconstruction of the nations and to repair their import and export capability through the purchase of new machinery, currency exchange, and improvements and repairs to infrastructure and transportation systems. Note that the bank gave any recipients money to improve their infrastructure and transportation at taxpayer risk. How much of any of these loans was repaid is not said.
The October 30 issue of C&E News said that Rep. Jeb Hensarling of Texas, who is Chairman of the House Financial Services Committee, is leading the drive to end the Bank. He and his associates argue that a government program that helps companies export products overseas distorts the free market. I agree. If a foreign buyer wants to buy American goods, and he does not have the money, he can obtain it from his own foreign banking facilities and/or get delayed payments from the American supplier. The latter should be a judgment of the American supplier and not look to the American taxpayers through the Bank for a guarantee.
Friday, December 19, 2014
Taxing Imported Oil
Our political associate has added a couple of points on OPEC oil strategy, but he is now concentrating initially on US oil production. He points out that US oil production has been increasing by 1 million barrels per day per year. He suggests that if this continues for five years, we will have added 5 million barrels per day to our production rate and that could make a significant difference.
I'm not sure how significant that difference will be, because we now have a production rate of 9 million barrels per day. If we had another 5 million barrels per day, our total production in five years would be 14 million barrels per day. However, we have been consuming 19 million barrels per day, which means that five years from now we will still be short 5 million barrels per day.
Our political associate goes on to say that he wants to stabilize the consumer price (generally to refineries) at $70 per barrel. He says that if the foreign supplier is charging $50 per barrel, the US would put a $20 tax on it to bring it up to $70 to the refinery. He says this would apply to 8 million barrels of imported oil, although as I mentioned above, imported oil would only be 5 million barrels per day, if US production increases at the same rate it has been for the next five years. However, starting a tax system immediately on imported oil would use the present imported amount of 10 million barrels per day, decreasing 1 million barrels per day year-by-year. By this process, he says we might be able to wipe out our national debt in 20 years.
The difficulty I find with that proposal is that as we set the floor price to $70 per barrel, OPEC will immediately accept the $70 price, and there will be no difference between the floor price and the selling price on which to levy a tax.
Another ramification which our political associate did not mention is taxing US production. If West Texas crude is selling at $50 a barrel to the refineries and the floor price is $70, we could add another $20 in tax to bring the price to the refineries up to $70. But again, West Texas crude suppliers would immediately counteract to bring their price up to $70, so that there will be nothing to tax.
Perhaps I missed something in our political associate's proposals. Here is what he had to say:
"Dr Sucsy,
Attached please find a multiyear chart of domestic US oil production. The chart indicates the times when OPEC has engaged in price slashing and the effect on domestic production. The exciting part is the oil production increase since 2009. The US production has been increasing at a clip that is close to 1 Million barrels per day per year! At $100/barrel that's $100,000,000/day per million barrels that stays in our economy and doesn't flow to our enemies. So the change from 09 to 14 is a 4 million barrels per day added production, which is $400 million per day added to the US's economy. That wealth staying in country benefits all of our citizens.
Over a year that is a boost of $146 Billion to our GDP added since 2009. The total effect of all domestic production last year was something like $328.5 Billion. No wonder the Saudi's are playing hard ball. This is starting to leave a mark. If the rate of increased production increased at the same rate for 5 more years, then we start to effectively manage our future and become ever more energy independent.
I agree that part of the plan should be to increase efficiency in our daily life, and that is happening. Our vehicles, homes and factories are getting more and more energy independent. Additionally alternative forms of energy are slowly beginning to increase, which for the long term is very important. The one-two punch (production-efficiency) is why I think the USA could be energy independent in a decade. That should be our national goal.
Our energy producers believe that they can keep this production curve headed in the right direction for the foreseeable future at $70 per barrel. A nice benefit of energy independence would be a level and more predictable energy cost.
Another benefit to keeping oil at $70/barrel is that many alternative energy sources are still economically viable, when oil reaches say $40-50/barrel the economic rules will force less development of alternative sources of energy.
Now for the kicker, if the US paid $50/barrel of imported oil (some experts believe it could go as low as $40) and then taxed those additional 8 million barrels $20 to get them to our price floor, then we could be paying on our national debt at a rate of $160 Million per day or $58.4 Billion per year! Over 20 years that's how we get our country back on track.
$70/barrel oil is a win-win for the US, which is exactly why our politicians will not go for it. I have talked to long, but I hate to see wasted opportunity."
I'm not sure how significant that difference will be, because we now have a production rate of 9 million barrels per day. If we had another 5 million barrels per day, our total production in five years would be 14 million barrels per day. However, we have been consuming 19 million barrels per day, which means that five years from now we will still be short 5 million barrels per day.
Our political associate goes on to say that he wants to stabilize the consumer price (generally to refineries) at $70 per barrel. He says that if the foreign supplier is charging $50 per barrel, the US would put a $20 tax on it to bring it up to $70 to the refinery. He says this would apply to 8 million barrels of imported oil, although as I mentioned above, imported oil would only be 5 million barrels per day, if US production increases at the same rate it has been for the next five years. However, starting a tax system immediately on imported oil would use the present imported amount of 10 million barrels per day, decreasing 1 million barrels per day year-by-year. By this process, he says we might be able to wipe out our national debt in 20 years.
The difficulty I find with that proposal is that as we set the floor price to $70 per barrel, OPEC will immediately accept the $70 price, and there will be no difference between the floor price and the selling price on which to levy a tax.
Another ramification which our political associate did not mention is taxing US production. If West Texas crude is selling at $50 a barrel to the refineries and the floor price is $70, we could add another $20 in tax to bring the price to the refineries up to $70. But again, West Texas crude suppliers would immediately counteract to bring their price up to $70, so that there will be nothing to tax.
Perhaps I missed something in our political associate's proposals. Here is what he had to say:
"Dr Sucsy,
Attached please find a multiyear chart of domestic US oil production. The chart indicates the times when OPEC has engaged in price slashing and the effect on domestic production. The exciting part is the oil production increase since 2009. The US production has been increasing at a clip that is close to 1 Million barrels per day per year! At $100/barrel that's $100,000,000/day per million barrels that stays in our economy and doesn't flow to our enemies. So the change from 09 to 14 is a 4 million barrels per day added production, which is $400 million per day added to the US's economy. That wealth staying in country benefits all of our citizens.
Over a year that is a boost of $146 Billion to our GDP added since 2009. The total effect of all domestic production last year was something like $328.5 Billion. No wonder the Saudi's are playing hard ball. This is starting to leave a mark. If the rate of increased production increased at the same rate for 5 more years, then we start to effectively manage our future and become ever more energy independent.
I agree that part of the plan should be to increase efficiency in our daily life, and that is happening. Our vehicles, homes and factories are getting more and more energy independent. Additionally alternative forms of energy are slowly beginning to increase, which for the long term is very important. The one-two punch (production-efficiency) is why I think the USA could be energy independent in a decade. That should be our national goal.
Our energy producers believe that they can keep this production curve headed in the right direction for the foreseeable future at $70 per barrel. A nice benefit of energy independence would be a level and more predictable energy cost.
Another benefit to keeping oil at $70/barrel is that many alternative energy sources are still economically viable, when oil reaches say $40-50/barrel the economic rules will force less development of alternative sources of energy.
Now for the kicker, if the US paid $50/barrel of imported oil (some experts believe it could go as low as $40) and then taxed those additional 8 million barrels $20 to get them to our price floor, then we could be paying on our national debt at a rate of $160 Million per day or $58.4 Billion per year! Over 20 years that's how we get our country back on track.
$70/barrel oil is a win-win for the US, which is exactly why our politicians will not go for it. I have talked to long, but I hate to see wasted opportunity."
Thursday, December 18, 2014
More on OPEC Oil
In a previous essay, I laid out the presumed strategy of OPEC in trying to regain its monopoly of global oil by allowing the price to freefall according to the market surplus. With its low cost of production, OPEC can stand lower prices, while the higher cost producers will continue to be forced out of business. At the point where OPEC is the only significant supplier for the global oil market, it will likely increase prices significantly.
My suggested strategy for the US was to take advantage of the present and perhaps future lower global oil prices, shutting down its own higher cost production facilities to standby position for the time when OPEC significantly increases price.
In response, one of my political associates had what I considered a novel approach. In the traditional trade of commodities, the supplier offers a quantity at a specific price. While there may be subsequent negotiation, the seller usually has price control. This is also standard procedure in the trading of crude oil. My associate suggested we reverse that procedure by having the consumer offer to purchase at a specific price. He suggests the buyer "offer to buy" price presently be $70 per barrel, but I also have the impression that our associate may want to give the buyer additional flexibility to go to say $60 or $80 per barrel, depending on global supplies and intended pricing of producers at the time.
Here is what our associate had to say:
"Dr Sucsy,
I would like to discuss the oil topic with you and your distinguished comrades.
The only reason that OPEC (Saudi Arabia is the lion share of the organization) is turning up the spicket is because the world has discovered that oil is abundant, but the cost of recovering this abundant oil is high relative to the cost of production in Saudi Arabia. This bunch (OPEC) did the same thing to us in the early 80's and drove US oil development into the ditch, they did this again in the 90's and essentially killed most US oil production. As soon as this is achieved, and when we are in deep trouble they turn down the spicket and turn up the heat, in 2009 the price of oil reached $150/barrel.
These people don't do this because they are our friends, on the contrary much if not most of the financial support for our muslim enemies comes from Saudi. I for one am tired of this. In the last year or so the US has become the world's largest energy producer. This is positively effecting not only our economy and influence, but it is diminishing others. Add to this the black market oil industry that is propping up ISIS and you get a lot of price pressure.
The US has never had an effective energy (oil) policy, at least not one that benefits its citizens. I propose the following for an adoption in the US:
Establish a floor for the price of oil at say $70/barrel. Oil can still be imported to the US but at the dock it will be tariffed to reach a minimum of $70/barrel. These taxes collected should be allocated and applied to our national debt. The cost of energy at $70 has been adjusted into our economy and will be easily digested. The great benefit will be to our domestic producers, they could count on a price which will cause them to risk and produce even more oil. As this happens our imports will drop and the world price will drop with it. Our enemies will lose much of their funding and our country will be stronger. In fact, it is estimated by some that the US together with Canada could achieve a position of being completely energy independent in a decade!!! Sarah Palin said the answer was 'Drill Baby Drill', she is right and we should maintain the conditions that achieve this.
Over the years we have shipped $Billions to the middle east, this would help dry that money river up. Imagine if all that money we have been sending to Saudi all these years started to pay off our debt, to me this is the plausible way of killing two birds with one simple policy.
I would like to know what the council thinks of this."
I believe this might work under present circumstances, but I also believe it would be much more effective if the US had less need for crude imports, which would give to the potential supplier the impression that the US is not being forced to purchase in order to supply its needs.
Present US consumption is about 18.9 million barrels per day. Production of US crude has been increasing but is still only said to be 8.3 million barrels per day. This is a big divergence, which is only made up by imports. It would be hard to convince foreign suppliers that we are in the drivers seat.
My suggested strategy for the US was to take advantage of the present and perhaps future lower global oil prices, shutting down its own higher cost production facilities to standby position for the time when OPEC significantly increases price.
In response, one of my political associates had what I considered a novel approach. In the traditional trade of commodities, the supplier offers a quantity at a specific price. While there may be subsequent negotiation, the seller usually has price control. This is also standard procedure in the trading of crude oil. My associate suggested we reverse that procedure by having the consumer offer to purchase at a specific price. He suggests the buyer "offer to buy" price presently be $70 per barrel, but I also have the impression that our associate may want to give the buyer additional flexibility to go to say $60 or $80 per barrel, depending on global supplies and intended pricing of producers at the time.
Here is what our associate had to say:
"Dr Sucsy,
I would like to discuss the oil topic with you and your distinguished comrades.
The only reason that OPEC (Saudi Arabia is the lion share of the organization) is turning up the spicket is because the world has discovered that oil is abundant, but the cost of recovering this abundant oil is high relative to the cost of production in Saudi Arabia. This bunch (OPEC) did the same thing to us in the early 80's and drove US oil development into the ditch, they did this again in the 90's and essentially killed most US oil production. As soon as this is achieved, and when we are in deep trouble they turn down the spicket and turn up the heat, in 2009 the price of oil reached $150/barrel.
These people don't do this because they are our friends, on the contrary much if not most of the financial support for our muslim enemies comes from Saudi. I for one am tired of this. In the last year or so the US has become the world's largest energy producer. This is positively effecting not only our economy and influence, but it is diminishing others. Add to this the black market oil industry that is propping up ISIS and you get a lot of price pressure.
The US has never had an effective energy (oil) policy, at least not one that benefits its citizens. I propose the following for an adoption in the US:
Establish a floor for the price of oil at say $70/barrel. Oil can still be imported to the US but at the dock it will be tariffed to reach a minimum of $70/barrel. These taxes collected should be allocated and applied to our national debt. The cost of energy at $70 has been adjusted into our economy and will be easily digested. The great benefit will be to our domestic producers, they could count on a price which will cause them to risk and produce even more oil. As this happens our imports will drop and the world price will drop with it. Our enemies will lose much of their funding and our country will be stronger. In fact, it is estimated by some that the US together with Canada could achieve a position of being completely energy independent in a decade!!! Sarah Palin said the answer was 'Drill Baby Drill', she is right and we should maintain the conditions that achieve this.
Over the years we have shipped $Billions to the middle east, this would help dry that money river up. Imagine if all that money we have been sending to Saudi all these years started to pay off our debt, to me this is the plausible way of killing two birds with one simple policy.
I would like to know what the council thinks of this."
I believe this might work under present circumstances, but I also believe it would be much more effective if the US had less need for crude imports, which would give to the potential supplier the impression that the US is not being forced to purchase in order to supply its needs.
Present US consumption is about 18.9 million barrels per day. Production of US crude has been increasing but is still only said to be 8.3 million barrels per day. This is a big divergence, which is only made up by imports. It would be hard to convince foreign suppliers that we are in the drivers seat.
OPEC Oil
Have you wondered about the decreasing price of gasoline? Were you aware that the Russian ruble fell 20% against the US dollar last Tuesday? It's all a matter of OPEC and particularly Saudi Arabian oil.
For a great many years, the Organization for Petroleum Exporting Countries (OPEC) has monopolized the world market for oil. Basically OPEC had set oil prices at levels which most businesses would consider exorbitant, but they could do so because they had control of the market; shipping most of the world's oil.
In subsequent years, other countries have developed their oil reserves and have come into the market as global suppliers. Generally, these new suppliers were small and did not threaten OPEC's market control. However, that situation has slowly changed. For example, in the first quarter of 2014 both the United States and Russia exported more oil than did OPEC.
With the new suppliers, there is not a glut of oil, but availability is abundant and the market price has naturally fallen
OPEC members met on November 27 to review their strategy. They were obviously losing control of world oil market. One option was that they could cut production rates to decrease oil supply, which would automatically raise prices. But, that would be of no help in maintaining profit, because the higher price would not compensate for the loss of volume. In addition, it would do nothing for their ability to reestablish global oil market control. Therefore, they took the big option, which was to do nothing.
The big option is to basically force out of business new marginal-cost producers. OPEC can do this, because it is a low-cost producer, with Saudi Arabia having a leading role. In 2012, production costs in US dollars per barrel for several major producing countries were:
Saudi Arabia 24
OPEC 37
Russia 38
US 41
Kazakhstan 46
China 47
Norway 48
The first competitor to fall was Russia, which obtains most of its foreign currency from oil sales. Global oil price had fallen from a high of $110 to $70 and then to $60. Russia probably controls Kazakhstan, but Kazakhstan is a high-cost producer and no help. In addition, OPEC said it was willing to let the global oil price fall to $40 a barrel. That pressure on Russia led the ruble to fall 20% last Tuesday against the US dollar.
Iran as a member of OPEC. It is said to have budgeted its oil exports at $100 a barrel. With the current price of $60-70 a barrel, they are also in trouble, but apparently have been outvoted by the other OPEC members.
We will have to wait to see what other marginal producers will fall, but the significant one is the US. West Texas crude is said to be $56 a barrel and even at that low price, the market is weak, which is leading to a decline in production. However, the US as a whole is in good shape, not because of its low production cost, but because of ancillary factors. The US is the largest energy intensive country in the world. It uses more oil per capita than any other country. It now produces a very large amount of oil, of which some goes to export. But, it also imports oil. In other words, contrary to the situation with Russia and Iran, it's life economic blood is not in the global oil market. A tremendous amount of oil is used by the US for its motor fleet for gasoline and diesel. While it cannot compete with the Saudis on production, it still has a great advantage in being able to import low-cost oil, under the new structure. This counterbalances any need to shut down local production.
Similar to the US, but in a more exaggerated position, are Japan and Western Europe. Neither of these have any significant oil production and depend completely on global imports. With the price of crude all falling from $110 to $60-$70, it is a heyday for them.
Going back to US considerations, if cheaper oil imports are favorable to the US, where does this specifically apply? First, to the US public consumer. If every time I now fill my tank, instead of it costing $30, it now cost $20, that's another $10 in my pocket for spending on things. Commercial transportation is also a winner. Airplanes and trucks use a lot of fuel.. Tourism is boosted with cheaper travel costs. More pressure is put on wind and solar energy. Installed wind turbines and solar panels can keep operating. Their construction was previously unjustified without taxpayer subsidy, but even that justification is now significantly reduced. Natural gas will still compete in home and commercial heating. It still is as cheap as oil.
While financial markets and particularly the US stock markets do not know what to do with this new information, one thing is certain and important and that is it's big. The Dow and the NASDAQ have been fluttering up and down for several days. A week ago, there were big losses, but sooner or later it will realize that the immediate aspects of OPEC policy are favorable to the US. Perhaps not as good as for Western Europe and Japan, but still good.
What about the future? If OPEC is successful in regaining its monopoly position as a global supplier by having forced out other higher cost producers, it will likely raise prices through cutting production. But if the US maintains its position of being independent of global oil supplies, it can restart local production to satisfy its needs rather than continue to import. This is also true for other producing countries, but the US likely has an edge in a slowdown production procedure, because it will recognize the need to have standby production with ability to start up on relatively short notice of say a few months. During that time the US economy will proceed merrily on its way. Other countries which have depended on oil exports for their lifeblood will have devastated economies and likely be unable to start up oil production on short notice.
For a great many years, the Organization for Petroleum Exporting Countries (OPEC) has monopolized the world market for oil. Basically OPEC had set oil prices at levels which most businesses would consider exorbitant, but they could do so because they had control of the market; shipping most of the world's oil.
In subsequent years, other countries have developed their oil reserves and have come into the market as global suppliers. Generally, these new suppliers were small and did not threaten OPEC's market control. However, that situation has slowly changed. For example, in the first quarter of 2014 both the United States and Russia exported more oil than did OPEC.
With the new suppliers, there is not a glut of oil, but availability is abundant and the market price has naturally fallen
OPEC members met on November 27 to review their strategy. They were obviously losing control of world oil market. One option was that they could cut production rates to decrease oil supply, which would automatically raise prices. But, that would be of no help in maintaining profit, because the higher price would not compensate for the loss of volume. In addition, it would do nothing for their ability to reestablish global oil market control. Therefore, they took the big option, which was to do nothing.
The big option is to basically force out of business new marginal-cost producers. OPEC can do this, because it is a low-cost producer, with Saudi Arabia having a leading role. In 2012, production costs in US dollars per barrel for several major producing countries were:
Saudi Arabia 24
OPEC 37
Russia 38
US 41
Kazakhstan 46
China 47
Norway 48
The first competitor to fall was Russia, which obtains most of its foreign currency from oil sales. Global oil price had fallen from a high of $110 to $70 and then to $60. Russia probably controls Kazakhstan, but Kazakhstan is a high-cost producer and no help. In addition, OPEC said it was willing to let the global oil price fall to $40 a barrel. That pressure on Russia led the ruble to fall 20% last Tuesday against the US dollar.
Iran as a member of OPEC. It is said to have budgeted its oil exports at $100 a barrel. With the current price of $60-70 a barrel, they are also in trouble, but apparently have been outvoted by the other OPEC members.
We will have to wait to see what other marginal producers will fall, but the significant one is the US. West Texas crude is said to be $56 a barrel and even at that low price, the market is weak, which is leading to a decline in production. However, the US as a whole is in good shape, not because of its low production cost, but because of ancillary factors. The US is the largest energy intensive country in the world. It uses more oil per capita than any other country. It now produces a very large amount of oil, of which some goes to export. But, it also imports oil. In other words, contrary to the situation with Russia and Iran, it's life economic blood is not in the global oil market. A tremendous amount of oil is used by the US for its motor fleet for gasoline and diesel. While it cannot compete with the Saudis on production, it still has a great advantage in being able to import low-cost oil, under the new structure. This counterbalances any need to shut down local production.
Similar to the US, but in a more exaggerated position, are Japan and Western Europe. Neither of these have any significant oil production and depend completely on global imports. With the price of crude all falling from $110 to $60-$70, it is a heyday for them.
Going back to US considerations, if cheaper oil imports are favorable to the US, where does this specifically apply? First, to the US public consumer. If every time I now fill my tank, instead of it costing $30, it now cost $20, that's another $10 in my pocket for spending on things. Commercial transportation is also a winner. Airplanes and trucks use a lot of fuel.. Tourism is boosted with cheaper travel costs. More pressure is put on wind and solar energy. Installed wind turbines and solar panels can keep operating. Their construction was previously unjustified without taxpayer subsidy, but even that justification is now significantly reduced. Natural gas will still compete in home and commercial heating. It still is as cheap as oil.
While financial markets and particularly the US stock markets do not know what to do with this new information, one thing is certain and important and that is it's big. The Dow and the NASDAQ have been fluttering up and down for several days. A week ago, there were big losses, but sooner or later it will realize that the immediate aspects of OPEC policy are favorable to the US. Perhaps not as good as for Western Europe and Japan, but still good.
What about the future? If OPEC is successful in regaining its monopoly position as a global supplier by having forced out other higher cost producers, it will likely raise prices through cutting production. But if the US maintains its position of being independent of global oil supplies, it can restart local production to satisfy its needs rather than continue to import. This is also true for other producing countries, but the US likely has an edge in a slowdown production procedure, because it will recognize the need to have standby production with ability to start up on relatively short notice of say a few months. During that time the US economy will proceed merrily on its way. Other countries which have depended on oil exports for their lifeblood will have devastated economies and likely be unable to start up oil production on short notice.
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