Why gas prices are so low

Global crude oil prices have sunk dramatically, falling to nearly $80 a barrel – a 30 percent drop from June. Unleaded regular gasoline prices are now under $3 a gallon. Falling prices are a boon to industrialized nations, but they shouldn’t make the mistake of assuming that oil will remain cheap indefinitely.

If you ask 10 experts why oil prices are so volatile, you are likely to get 10 different answers. But they all boil down to supply and demand.

In recent years, the ranks of major economic achievers were swelled by the emergence of formerly developing third world nations – especially population giants like India and China. The result was a significant increase in the number of middle- and upper-class consumers eager to enjoy a more lavish lifestyle. Such a lifestyle inevitably meant higher consumption of oil products, which generated upward pnce pressure.

The reason crude oil prices have been falling since early June is the global economic slowdown, especially in Asia and Europe. Demand is down at a time when oil is abundant, especially with substantial increases in U.S. production, which is at its highest level in 30 years thanks to shale oil drilling in North Dakota and Texas. United States crude oil production has climbed to just over nine million barrels a day and is projected to approach 9.5 million next spring. Adding to the excess supply, production is up in Russia as well.

As a result, imports from the 12 OPEC countries responsible for about a third of global production have been cut in half. OPEC members who rely on higher oil prices to balance their budgets wanted to announce production cuts at their Thanksgiving Day meeting in Vienna and are looking for Saudi Arabia to take the lead.

The decline in crude oil prices accelerated last month when the Saudis, the world’s largest oil producer at 9.6 million barrels daily, cut the price of exports to the United States in an effort to retain its shrinking market share and, some speculate, undercut America’s oil shale bonanza. The thought is that the Saudis can push the price of crude oil below $50 per barrel and still make money.

In the past, oil producers struggled to respond to the problems of letting supply run wild by developing “gentlemen agreements” to control supply in “rational” ways. The most notorious of these producer cartels is OPEC.

The difficulty with the cartels is that many of their members aren’t gentlemen. They can’t resist opportunities to make hay while the sun shines by sneaking extra oil onto world markets to take advantage of temporary price spikes or marching to the beat of their own drummer and cutting prices, causing other members to wrinkle their noises in disgust- before joining the party so they don’t get left behind.

One of the few economic laws that’s truly ironclad is the practical impossibility of enforcing cartel supply and price restrictions without the kind of outright physical violence that is generally only acceptable among New York’s Five Families.

Falling oil prices are providing a boost to the U.S. economy with lower costs for consumers and energy­ sensitive industries. It has been estimated that the cut in crude oil prices to $80 a barrel is the equivalent of a $600 tax cut for every household. This should be music to the ears of retailers who had been bracing for a slow-growth holiday shopping season.

originally published: November 29, 2014

The D.C. tempest that is the Ex-Im Bank

All the world, as the man said, is a stage, and the little-known Export-Import Bank is center stage in Washington’s latest political tempest. Conservative lawmakers are mounting an unwise push in the House of Representatives to pull the plug on the bank ahead of a Sept. 30 deadline for its charter to be renewed. The so-called Ex-Im Bank is funded by the U.S. Treasury (a.k.a., taxpayer dollars) and encourages the sale of American exports by providing direct loans, loan guarantees, working-capital guarantees and export credit insurance to foreign buyers and assists U.S. exporters. All these financial products carry the full faith and credit of the U.S. government.

In recent years, the bank has been the target of conservative lawmakers who want to shut it down. Currently, they are mounting a push in the House of Representatives to pull the plug on the bank ahead ofthe Sept. 30 deadline.

President Franklin D. Roosevelt established the Ex-Im Bank in 1934 to help finance overseas sales of American goods to combat the global collapse in trade and trade credit during the Great Depression. In 1945, it was made an independent government agency, which made it easier to obtain capital from the U.S. Treasury to help reconstruct war-tom Europe.

More recently, the bank extended a multi-million-dollar direct loan to finance exports of gas turbine generators from General Electric to three power plants in Saudi Arabia. Alternatively, if a foreign buyer of an American product sought a loan from a commercial bank, that bank could apply for a loan guarantee from the Ex-Im to cover the debt in the event of a default and pass the costs to the buyer.

Ex-Im Bank also offers export credit insurance to American exporters to protect against the political and commercial risks of defaults by foreign buyers. Finally, the bank guarantees working-capital loans extended by commercial banks to eligible exporters with exportable inventory or export receivables as collateral.

The bank does not give these services away. It uses the interest and fees it charges borrowers to reimburse the U.S. Treasury.

Critics claim the commercial lending market, not the government, ought to fund trade finance deals. The bank is derided as an expensive boondoggle, providing large, politically connected multinational firms with an unfair competitive advantage. Critics also argue that there is little evidence to support the notion that the bank is a major export driver, since it finances less than 2 percent of the $2.2 trillion worth of goods and services American firms exported in fiscal 20 13.

Ex-Im supporters say American exports are tied to jobs and economic growth and that the bank supports exports by assuming risks that commercial lenders are unwilling to take on. They say it provides small and medium-sized businesses with important services at reasonable prices.

America needs the bank because, in the current global economic landscape, other countries have export credit agencies that offer comparable services. Without it, American exports would be at a competitive disadvantage.

In an ideal world, businesses would obtain trade financing from privately owned banks. But since more than 60 countries have export credit agencies, shutting down the bank would amount to unilateral disarmament.

Unilateral disbarment doesn’t work any better in global trade than it does in warfare. That’s why America should not abolish the Export-Import Bank without securing reciprocal action from other trading countries that have their own export credit agencies.

originally published: July 5, 2014