Last December, on my way to class, I passed by the gas station and realized that the price of gas was just under a dollar. Many people are content, as it takes significantly less money to fill the tank. However, what does the oil price drop entail? Who benefits?
The drop of oil prices by about 50 percent has generated positive and negative effects for different nations.
While the US and China are seen to have benefited from the price drop, countries such as Iran and Russia are having economic difficulties.
This is mainly due to the fact that the US and China rely heavily on oil imports while on the other hand Russia and Iran rely greatly on oil exports.
The causes behind the price drop are varied, however. One of the most important causes is the fact that the US has substantially increased its oil production by exploiting shale oil. Shale oil is produced by chemically processing oil from shale rocks. The increase in American oil production has decreased its need for oil imports, and has also put a downward pressure on the global oil price.
The oil price decrease has positively affected the US but has done the opposite for oil-dependent countries such as Russia. In fact, coupled with western economic sanctions, due to the situation in the Ukraine, the oil price drop has created severe economic instability in Russia.
As The Economist argues, “hydrocarbons contribute over half the federal budget and two-thirds of exports. The state has big stakes in many energy firms, as well as indirect links via the state-supported banks that fund them.” As a result the oil price shock had a profound impact.
One of the main negative economic effects was the falling currency exchange. Anna Nikolaeva, a fourth year Trent student from Russia explained that on December 16 2014, which became known as the “Black Monday”, the currency exchange of Euro and US dollar to Russian ruble skyrocketed.
That meant that the price of the Euro and the US increased to roughly 100 rubles and 80 rubles respectively.
Nikolaeva explained that the situation in Ukraine, followed by the sanctions imposed by the United States and European countries led to the lack of foreign investment into Russian businesses, which contributed to the currency crisis.
The price drop also has effects for Canada as well, as the economic gain generated by the Tar Sands will have to be re-evaluated by the Federal government. Lower oil prices means lower revenue for the Canadian state.
This is important because an enormous part of Prime Minister Harper’s discourse is based on the economic gain of exploiting resources in the west, despite increasing negative social and environmental impacts.
This is significant to Trent at a time when active students of our community are strongly advocating for divestment. What would the price drop entail for Trent’s investments in the fossil fuel industry? Could this an opportunity to divest?
On another note, the price drop may also detract people from looking at the unavoidable need to move away from fossil fuel as the energetic basis of our societies.
Inexpensive oil may decrease the economic incentive to be more energy efficient. Low prices could generate increased demand, which will also put even more pressure on our environment.
It is important to also look at how the price of a commodity is conceived in the first place. Surely, the current paradigm rests on the notion of scarcity. The less scarce a resource is, the lower its price and vice-versa.
However, even if oil was abundant, the price should not be low due to the environmental costs associated with its production and consumption.
Moving away from fossil fuel based societies will entail including the marginal social and environmental costs in its price.
It will also involve, as Matthew Huber argues, challenging the notion that oil’s inherent power comes from its physical properties rather than the socio-political context of our time.