How the Oil Price Plunge Could Backfire on the Economy

Photo Credit: AP/Shutterstock
December 28, 2018
Updated 1mo ago

By Carlo Versano

With crude oil benchmarks approaching 18-month lows ー U.S. light crude is down more than 20 percent on the year ー consumers are getting relief at the pump, which has translated to booming holiday retail sales and a record VM (or vehicle-miles-traveled) number, which itself is an indicator of a strong economy.

But John Hofmeister, former Shell Oil ($RDS) president and current CEO of the non-profit Citizens for Affordable Energy, is here to rain on the parade.

Hofmeister told Cheddar that the American consumer is likely to pay for the current low gas prices in the longterm, as the price of oil is currently too low ー a barrel of crude is trading shy of $50ー to sustain future investment on the production side.

"People should enjoy the lower prices for now, because they certainly will not last," he said.

Commodities traders have the luxury of chasing prices up or down and making money either way. But, as Hofmeister noted, "that's not the producers' world." Drillers, exploration, and oil service companies need income to pay for future production ー to develop fields and drill the offshore wells that will keep supply humming for years. Those wells are a particular concern because much of the current production is generated by fracking shale gas formations in places like North Dakota, while the more expensive offshore wells are being neglected. While drilling can be covered by today's prices "just barely," they aren't high enough to sustain future exploration, meaning producers are largely deferring capital investments until prices go back up.

If demand continues as is, there is bound to be a shortage in supply, Hofmeister said.

In Hofmeister's view, consumers whose main interaction with the price of oil occurs at the gas pump would be wrong to dismiss worries about supply and demand. The price of oil affects many things ー from airline tickets, to plastics, pharmaceuticals, nylon jogging pants ー and an elongated supply issue that results from deferred production will have a ripple effect, whenever it happens.

"Today's oil price will take care of today's needs today," Hoffmeister said.

"But forget about tomorrow."

For full interview click here.