Oil Insights: Economic Growth or Sustainability?

As snowy Middle Eastern weather forces an armistice in the Syrian Civil War, frigid temperatures in America are matched by a freeze in the collapse of oil prices.  For the Middle East, resolving instability in the global energy market and threats to regional security would do a great deal to help the region move forward in its development.  That said, oil offers the world a valuable lesson when it comes to economic sustainability.

When oil is up, oil-producing countries find themselves able to spend on whatever priorities their governments deem worthy.  When oil is down, oil-consuming countries see much of the benefit in terms of lower costs and higher consumption. Conversely, there is great human suffering whether oil is up or down in our global economy where sustainability takes a backseat to growth at all costs.

For a country like the United States, lower oil prices are good for most Americans, except for those who depend on the oil industry for a living, because it allows them to consume more.  When that consumption benefits American goods and businesses, the overall US economy wins.  

Unfortunately, lower oil prices jeopardize the sustainability of the American oil industry.  After all, a booming industry also creates consumption and stagnant economy suppresses demand.

By many accounts, Middle Eastern oil-producers, Saudi Arabia in particular, are able to produce a barrel of oil for just a few dollars.  In a truly global free market system, the US oil industry would be gladly sacrificed in order to serve the much broader interest of cheap energy for all.  

If Americans were free trade purists, the US would have long ago pursued a “free trade” zone with Middle Eastern oil-producers that levied the threat of tariffs on foreign oil to open Middle Eastern markets to tariff-free US manufactured goods.  

In theory, cheap oil would flow to the US while the US would provide manufactured goods that would support the oil industry in the Middle East.  In turn, the Middle Eastern governments would fill their coffers with oil revenue and the United States would tax consumption of oil in order to pay for government services, e.g. gas taxes for maintain the roads.

That said, the issue with allowing the American oil industry to die during the 1980’s or the 1990’s in favor of cheap crude would have been a lack of energy security.  Not only would OPEC have the ability to dictate oil prices, which it did have the ability to strongly influence global oil prices until a few years ago, the US would not have the domestic capacity to provide for our energy needs when production was disrupted due to political instability.

(For those in the Middle East, importing American goods/Chinese goods would undermine the development of local manufacturers, thus only those involved in the oil industry would financially benefit from such an agreement.  In essence, much of the population would be locked out of the global economy.  That is, unless Middle Eastern governments subsidized their local industries as China did.  It would also mean Americans would become consumers of oil, yet lose their ability to pay for that oil through a lack of well-paying manufacturing jobs.)  

With that in mind, it is important to recognize the rationale for pursuing “free trade” is to open new markets in order to increase consumption of goods and services.  Increasing the value of a product or service, which is most easily done by reducing its cost, spurs increased consumption. 

Because all consumption and production are finite in the real world, at certain points in time increasing consumption is not possible.  When consumption cannot be increased, profit growth must be achieved by reducing the cost of production. 

Reduced production costs, of course, must be taken from somewhere.  If cost-cutting measures focus on labor, fewer workers and/lower wages harm consumption.  This is why so many US manufacturing jobs were shipped off to China where labor costs are far lower and workers did not spend as much as Americans.  In turn, worker-consumers lost much of their ability to consume.  In essence, the continual need to increase growth through consumption eventually leads to decreased production, which forces decreased consumption, i.e. economic collapse.  

When it comes to oil, excessive production does lower the price of oil; however, it also drives growth of the economy, which drives inflation, i.e. increased costs.  Because oil is a finite resource and overuse of oil comes with other costs, reducing expenses through reduced operational costs eventually becomes necessary.  

In essence, this means finding ways to reduce workers, equipment, expensive, i.e. pay supplier less, etc.  In other words, oil companies need to increase their profit by cannibalizing off the profit of their workers, supplier, consumers, and so on.  Over time, starving other industries and consumers of their ability to consume, i.e. to have well-paying jobs, helps create increasingly violent economic instability.

Given the destructive nature of the free market affects other economic sectors, such as the manufacturing and financial services sectors, underpriced then overpriced commodities like oil create bubbles in the economy that generate ripple effects when they burst.  When this happens, the economy fails.

Looking back at the 2008-2009 Great Recession, this is, in part, what happened to the global economy.  Where commodities like oil played a role in the Great Recession, far broader issues with bubbles in the economy were responsible for that particular catastrophe. 

Ultimately, the Great Recession was caused by an inability to continue consumption.  In the US, a failure of the economy to properly distribute wealth, i.e. not enough jobs offering sufficient income existed to provide for increased spending, reduced the ability of consumers to spend.  To continue consumption and sustain the US economy, Americans turned to credit, which included borrowing from their homes, in 1990’s and 2000’s.

At the same time, Wall Street, with the help of the US government, invented new ways for American consumers to borrow in order to purchase increasingly overvalued homes.  Because Americans did not have sufficient income to continue their consumption to support the US economy and pay back what they borrowed, the true value of subprime mortgages came to light when the US economy inevitably encountered a downturn then crashed. 

Looking at the ongoing stream of news on companies like McDonalds and Wal-Mart, concerns over a failure of these global giants to continually increase their profits, despite the fact they are still profitably, demonstrates the unrealistic nature of the financial world. 

People can only eat so many burgers and fries while the world only needs so many McDonalds.  In turn, McDonalds can only do so much to cut its costs before undermining the functionality of its business.  Consequently, there comes at point when increased profits are not possible.

Clearly, McDonalds does not necessarily fall apart when it can no increase its profitability.  Similarly, the economy does not disappear when it can no longer grow, though the world’s obsession with growth does push investors and policymakers to pursue growth at the expense of building a sustainable economy.

When faced with a lack of growth, companies like McDonalds must turn inward and focus on reorganizing their business models to provide better products and services.  Similarly, the economy must do so as well, i.e. focus on the needs of the People of the world, as it struggles to grow.

In many respects, our growth-obsessed economy is built like Las Vegas.  Las Vegas runs on excess and overindulgence while it drains the wealth of many for the benefit of the few affluent with little going to workers.  To survive, Las Vegas continually reinvents itself by using controlled explosives to knockdown old buildings in order to make way for new ones.  When the bubble bursts from a lacking excess, however, the community of Las Vegas goes bust in a way that causes great human suffering.

Unfortunately, our economy has been engineered to cater to global interests by creating a lower bidder economy where cost-cutting measures, including decreased wages, tax cuts, etc, are prioritized in order to achieve growth.  Instead of building our economy to serve the needs of the people first then using the excesses of the local and national economies to participant in the national and global economies, we have an unsustainable economy.