The hidden dangers of low oil prices

Dan Weissmann Nov 24, 2014

The hidden dangers of low oil prices

Dan Weissmann Nov 24, 2014

If OPEC doesn’t decide to cut oil production when it meets in Vienna this week, some say oil could fall to $60 a barrel. Lower costs sound like bad news for the oil industry and good news for the rest of us.

But it’s not that simple. There are other losers – and a chance that $60 oil could end up being bad news for all of us down the line.

Other losers

The oil boom has produced one big set of winners outside of the traditional oil business: the whole economies of oil-producer states like North Dakota and Texas. 

“The places where the booms have been occurring have largely benefited from increases in land and housing prices,” says economist Michael Greenstone, director of the University of Chicago’s Energy Policy Institute. “They’re now going to give some of that back.”

Broader risks

When oil prices collapsed all of a sudden in the late 1980s, it blew back on the rest of us, says Michael Webber, deputy director of the Energy Institute at the University of Texas at Austin.

First, he says, oil producers in Texas and Oklahoma went bankrupt, “which caused a lot of land deals to go bad— because the land had been overvalued, which caused tens of thousands of savings and loans to go bankrupt and belly up, which caused a nationwide S&L scandal, which eventually led to recession.”

That particular set of dominoes isn’t likely to fall this time, Webber says. But it’s an example of what can happen.

Wild cards

Nobody knows for sure whether we’re looking at a long stretch of low oil prices. Maybe we’re looking at a stretch of volatility – prices that go up and down.

That can slow down the economy, says economist Christopher Knittel, director of the Center for Energy and Environmental Policy Research at MIT.

He starts with household example:  Gas prices are high, so a family buys a Prius instead of an SUV. “Now, if oil prices fall, then they wish they had bought the more-powerful car instead of the more fuel-efficient car,” he says.  

But it’s too late, the money’s been sunk. Companies can also get caught with the wrong big-ticket items. Airlines, railroads, shippers. “When they bet wrong, then their prices have to increase,” says Knittel. “And we pay those prices.”

The really big picture

Lower gas prices could have another cost: More driving, which leads to more carbon emissions and more global warming. Economists are still struggling to calculate the price, but they expect it to be high.

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