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2016-02-25 11:03:41
Jeff Kehoe
February 15, 2016
In the past, low oil prices have been seen as a boon, particularly at the gas
pump. They ve been credited with boosting economies and stirring growth. But
recently oil prices have dropped so low that warning bells rippled through
global markets, and they remain volatile. What does all this mean for countries
and companies? How big is the risk?
For answers, I talked to Ian Bremmer, president of Eurasia Group and author of
Superpower: Three Choices for America s Role in the World. An edited version of
our conversation is below.
HBR: Do you see sustained low oil prices as a risk? How so, and how large?
Bremmer: Markets have been diving on low oil prices recently not because the
traditional understanding is broken; it is still true that low oil prices are
good for the U.S. economy as well as for Europe, China, India. All of these
consumers are going to benefit. The problem is that the IMF has been
downgrading growth. They re concerned about monetary supply, a Chinese
slowdown, crises around Europe, and also that U.S. growth is not quite as
robust as you d like it to be.
The risks in lower energy prices have a lot more to do with sustainability of
some of the governments around the world that are really dependent on commodity
revenues for their own legitimacy and power. Venezuela is going to default in
the next six months if the Chinese don t find the wherewithal to bail them out
significantly. Russia, as a big oil producer, is feeling real strains nothing
destabilizing yet, and Putin is in total control, but taxes and inflation are
going up. Nigeria is going to need a new IMF program.
Most worryingly, of course, are the petro states in the Middle East and the
emerging-market producer countries with brittle institutions that are trying to
stay stable when the one thing that provided them legitimacy the ability to
write really big checks is falling apart. Plus, we have Iranian sanctions
coming off, which is going to lead to a lot more Iranian production, a lot more
Iraqi production, and more Libyan production. These prices are going to stay
low for some time. This is structural.
There has been hand-wringing about a possible connection between sustained low
oil prices and the risk of another global recession. Could oil prices actually
be driving increased risk of a slowdown?
I don t think so. I know people say that every 7 8 years on average we ve had a
recession in the postwar era, and the last one was in 2008, so we re due.
People see all of the economic constraints in growth around the world. These
gain some momentum in the news, then seeing oil prices dive makes people grow
more negative. But that s very different from saying we re on the cusp of
another global recession, and it doesn t feel like we re entering that kind of
environment right now, oil prices or no.
Do you think lower oil prices could slow the transition away from fossil fuels,
the demand for electric vehicles, the shift to wind and solar, and other
renewable sources of energy?
Clearly, the shift in price pushes out the date that you expect these things to
really expand and become large market participants globally, but I don t think
there s any possibility the transition to renewables will just stop or slow
dramatically. We re well beyond that point. Governments around the world are
very much onboard with the notion of climate change and believe that it s going
to get worse. Industrial renewables are still going to be huge.
Keep in mind that if you re China, you need everything. The growth and energy
demand in China is immense. They re investing more in nuclear than anyone
around the world. They re not going to stop doing that because energy prices
are low. They know they need it. They re going to do huge amounts of wind, a
huge amount of solar, and that s going to continue to drive a lot of research
and to generate technological benefits in the economy as well.
In your tweets and commentary from Davos, you remarked on something called the
Fourth Industrial Revolution. How is this connected to what s going on with
oil?
By the Fourth Industrial Revolution, people mean things, like automation and
AI and genomics and 3D printing, that are going to transform every sector and
take jobs out of economies. Most people I spoke to at Davos thought that this
transformation would happen within 10 years, that we ll see dramatic changes in
the way we think about these sectors and in labor.
I generally agree, but the revolution is already hitting energy, right now.
Seems like just yesterday we thought we had peak oil, we thought we were
running out, that it was in the hands of traditional producers. Suddenly,
overnight, it s in the hands of a number of entrepreneurs unleashed on the U.S.
market. Within the course of just a few years, fracking went from being viewed
as never-going-to-happen to a world-changing technology.
America is now the largest energy producer in the world. The problem is, if you
re Saudi Arabia, it s not labor that makes your economy work, it s oil. A year
ago, if you talked to Saudi leaders, they would have told you, Oh, this is a
pipe dream, pardon the pun. They didn t prepare for this over the past decades
when times were good. Now time has suddenly turned against them very quickly.
For them, this Fourth Industrial Revolution is not only disruptive, it s
disruptive in a big way, immediately.
How should we view the fact that America is now the biggest energy producer in
the world? How does this change the U.S. perspective or behavior?
We like it, we like it a lot. What s significant is that we re no longer a
high-priced energy producer, we re a medium-priced energy producer. We were
high-priced just a year or two ago, but the fracking industry changed that. It
s very competitive, very decentralized. We re getting more efficient at
producing at a lower cost because of the market pressures.
Also, keep in mind that energy is a relatively small piece of the U.S. economy.
When you talk about what drives the U.S. economy, you re talking about finance,
you re talking about IT Apple and Facebook and others. So, on balance, low
energy prices are still an unmitigated good for the U.S. This is true from a
macro perspective as well as for the average taxpayer. Paying vastly less at
the pump equates to a significant tax break for working-class and middle-class
Americans. Many of them are still paying a lot of money just to be able to
drive back and forth from home to work.
There s been quite a bit of discussion about winners and losers. The obvious
losers are producers and the banks. The winners are consumers and,
traditionally, the overall economy. Who s missing? Are there hidden winners or
losers?
Xi Jinping is a huge winner. This is a guy that desperately needs to transform
his economy and needs to move away from low efficiency, but he doesn t want
instability. Much lower energy prices allow him to smooth a lot of the pain
that China is facing with its reforms, to actually open up to more market
pressures and respond to them without just crunching people completely with
restrictions. I think that s a real benefit for him.
I should also say, people have been concerned about a significant Chinese
slowdown. They see all of the economic constraints in growth around the world
that have been gaining momentum in the news over the last months. Then seeing
oil prices dive and stay low makes people even more anxious. But China has the
tools to push this off. The government can use further stimulus from their over
$3 trillion in reserves. Also, unlike the U.S., China can demand that Chinese
market participants actually allocate capital to continue to prop up the market
and growth. That s going to maintain economic and political stability and allow
China to continue to reform strongly. Low oil prices definitely help with that.
Lastly, what strategic points do businesses need to think about or understand
when it comes to the implications of low oil prices?
I think the big picture here is that as we re entering a world where there is
much more volatility from geopolitics and from technology, we need to recognize
that we will focus less on growth and more on resilience. It doesn t mean there
won t be some unicorns and new technologies and companies that will take off,
but generally speaking, the average investor or the average business has to
recognize that the quality of their growth is going down.
This is a world that s much more volatile, a world driven by emerging markets
that are much more brittle, where labor s going away and the consumption that
traditionally comes on the back of that is harder to guarantee. That s a world
where you generally want to ensure that your money s safer, that the markets
you re exposed to are stabler, and where you can predict market conditions more
effectively over time. I believe people are going to focus more on resilience
in their investments, on anti-fragility, on stability.
This world is changing from an economics-driven world to one that s more
politically driven, and the markets are changing in that regard. It s going to
create some big shifts.
Jeff Kehoe is a senior editor at HBR Press.