What have we Learned from the Experience of Low Oil Prices?

Abstract

This article is an attempt to assess the effect of the low oil prices the world experienced in the mid‐1980s, 1998 and early 1999. Such an assessment will help us predict the consequences of low oil prices in the future. The study focuses on the boon and bane of low oil prices from the producers' and consumers' points of view.Low oil prices, which are not related to technology and lower production costs, have depleted oil reserves, increased the income gap between consumers and producers, created friction among OPEC Members and between OPEC and non‐OPEC producers, and led to the imposition of tariffs on oil imports in consuming countries. In addition, they have led to economic hardship in oil‐producing countries, including declines in oil revenue, budget deficits, budget cuts and cancelled projects, borrowing and debts, deterioration in the balance of payments, negative economic growth, currency devaluations and political unrest. They have affected oil companies through reduced earnings, forced lay‐offs of workers, lower investment and increased mergers. Despite these disadvantages, oil producers may benefit from low oil prices in the long run. They will increase demand, slow the process of substitution and decrease non‐OPEC production.Consumers, on the other hand, will benefit from low oil prices, through higher economic growth and disposable income, and lower legislative and import costs. In addition, consumers will drive faster and longer. These benefits do not come without cost. Low prices will also increase the future vulnerability of consuming countries and lead to more dependence on oil at the expense of alternative energy sources, more dependence on oil imports, more waste, more environmental damage and less efficiency.After outlining the advantages and disadvantages, the study concludes that the disadvantages of low oil prices outweigh their benefits; that is, low oil prices have caused substantial damage. This is due to market inefficiencies and imperfections that include government intervention, especially in consuming countries. Competitive markets, on the other hand, may not lead to such damage.Also, the recent increase in oil prices may have been caused by the low oil prices in 1998 and early 1999, which resulted in lower investment and maintenance spending that, in turn, led to reduced capacity and production.