Why the Spike in Oil Prices Won’t Hurt the Economy – or Influence the Election
Policy + Politics

Why the Spike in Oil Prices Won’t Hurt the Economy – or Influence the Election

With market analysts predicting that another plunge in global oil prices might be on the horizon, OPEC, the global cartel that controls much of the world’s oil production, announced a preliminary deal among its 14 member countries to slash production by more than 1 million barrels a day, causing an immediate surge in oil prices on global markets that continued into early afternoon Thursday.

The move by the Organization of Petroleum Exporting Countries was largely unexpected, and its impact is unclear, but it has the potential to have far-ranging effects on everything from consumer prices to the U.S. presidential election, and any number of things in between.

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OPEC’s influence over global oil prices is far less powerful than it once was, as new sources of crude oil -- in particular the shale oil deposits being exploited through hydraulic fracturing in the U.S. -- have loosened its once iron grip on global supply.

Still, the news that the 14 member countries had agreed to work toward a deal at their next meeting, at the end of November, could have a number of possible side-effects.

The first, obviously, is on oil prices. The cost of crude oil jumped sharply Thursday on the promise of a reduction in supply. If it continues to climb, consumers can expect to see increases in the price per gallon at the gas pump.

And when gas prices rise, well, the price of everything rises because of increased transportation and production costs.

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If that particular dynamic begins to play out in the near term, it will almost certainly become an issue in the presidential campaign. Republican nominee Donald Trump has gone out of his way to paint the U.S. economy as a disaster -- a description that Democrats and most economist contest -- and would surely use rising gas prices and their associated effects on the broader economy as a club to bludgeon his Democratic opponent, Hillary Clinton.

However, there are at least two reasons to doubt that the OPEC production cut will take oil prices in that direction.

First, there is the real possibility that the 14 member nations of the cartel won’t be able to come to an agreement on the production cuts and how they will be distributed across members.

Second, even if OPEC goes ahead with the production cut, it is unclear just how much impact it would have on global prices.

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One of the reasons why the cartel has been content to allow the price of oil to slide as much as it has in recent years is that its members generally have a low cost of production, meaning they can still profit at lower prices. That contrasts with much of the shale oil extracted in the U.S., which is relatively expensive by contrast.

That means that as prices rise globally, it makes sense for shale oil producers to increase production, because once-borderline operations begin to move toward profitability. That could mean that any decrease in production by OPEC states could be offset by an increase in non-OPEC production, keeping price increases relatively modest.

The increase in production in U.S. oil fields, though, would have the effect of boosting the U.S. economy by increasing domestic production. That would take some of the edge of Republican claims that the Obama presidency has been terrible for the fossil fuels industry at a time when the GOP’s presidential campaign has made that a key element of the sales pitch.