Oil Gluttony

As I’m not a commodities trader (shocker!), I have not been in the habit of following the daily ups and downs of the price of oil.

Except that, lately, you’d have to be living under a rock not to know that the price of Brent crude and West Texas Intermediate have collapsed, breaching the $30-level and hitting a 12-year-low.

Of course, the weakness in the oil market has already been big news for months now, as prices nosedived from around 60-70 dollars just seven months ago.

In this new year, however, cheap oil has become THE economic story. The price seems to be heading ever lower ($28 today), and nerves are getting frayed over the ramifications for the global economy at large. Things will only get worse for oil now that sanctions against Iran have been lifted, allowing that nation to openly add its considerable oil production to the glut.

Naturally – unless you are in the oil business, and many people are – you might see crude at $30, or even lower, as a net positive. Gasoline prices in the US have dipped below two dollars a gallon, almost half of the price 18 months ago, creating a windfall for American drivers. Gas in Finland is also relatively cheap now, around $6 a gallon, compared to the more normal $9. (I remember that when I worked at my father’s service station back in high school, and before the 1973 oil shock, gas was a mere 0.29¢ a gallon.)

Strangely, Obama’s critics, so eager to blame him when gas was almost $4, seem to be withholding their praise for him for making gas so cheap now – perhaps suddenly realizing that presidents don’t have much to do with the price of gas.  Funny how that works.

For American families trying to live on a tight budget, cheap gas brings welcome relief, of course. On the downside, however, I worry that cheaper gas just gives road-happy Americans even less incentive to alter their wasteful lifestyles. The privilege of pumping carbon into the air just got a lot cheaper, so why hold back? Drive, baby drive!

Still, where cheaper oil is a having a not-so-positive effect is with the producers, especially those countries that depend too much for their own good on drilling deep into the ground and pumping petroleum to the surface.

Oil-producing nations, most prominently Saudi Arabia and Venezuela, have been in the media spotlight as the current glut exposes how their over-dependence on exploiting fossil fuels threatens to unbalance their economies. Finland’s neighbor Russia is also certainly one of those nations that has gotten a lot of media attention as a country facing tougher times if the oil glut continues. The reports are often bleak.

A friend on Facebook recently wondered why you don’t hear similarly dire news about some less-known oil producers, especially another Finnish neighbor, Norway.

That got me wondering, as well:  what exactly is Norway’s situation, and how does it compare to Russia’s own much more publicized dire straits.

In some ways, Norway and Russia are in the same boat. Petroleum makes up between 66-70% of Russia’s exports, a significant enough share. Norway relies less on hydrocarbons, but only by a little, something like 64% of its exports. Both are largely one-trick ponies and both are seriously affected by the downturn in oil.

There is a nifty measurement, the Economic Complexity Index, that expresses how complex a nation’s economy is, based in large part on the diversity of the country’s exports. Both Norway (in 33^rd place) and Russia (50^th) are ranked well below more economically balanced nations, such as the US (14^th) and Germany (2nd). I was a bit surprised to see that Finland ranks a very respectable 8^th. Good for Suomi.

So, both Russia and Norway are similarly disadvantaged by having too many of their eggs, so to speak, in the same basket. There seem to be big differences, however, in how well each country might be able to cope if that basket of eggs is upended.

Reuters has reported that the budget for the Russian government is projecting a 3% deficit for this year – based on oil at $50. If oil stays at $30, the deficit will grow to 5%. That’s not necessarily a huge deficit, mind you. Still, oil at $20 or less, as some analysts have predicted, will put even more strain on government finances.

Making up for the shortfall might force Russia to inflict additional economic pain on its citizens, who are already dealing with a recession. This would involve cutting spending and raising taxes, measures that have already sparked some strikes by protesting truck drivers.

Another tack would be to dip into the country’s “rainy day” funds, two sovereign wealth funds that contain some $130 billion. Those accounts have already been depleted by $50 billion since 2014. According to an analyst quoted by Reuters, resorting to using those funds to plug the budget gap would drain them dry in a little over a year, if oil stays low that long.

By contrast, Norway is in a much better situation. It is not in a recession and has no deficit. Yet. In 2014, it still enjoyed a budget surplus of 9% even after a downward trend over the last few years.

Still, the oil glut has certainly hit the Norwegian economy, and there are reports the country may be forced, for the first time ever, to withdraw from its own “rainy day” fund. I find it somewhat amazing, that this fund contains a whopping $856 billion, more than five-times that of Russia’s.

Little Norway, it seems, has done a comparatively much better job managing its oil wealth. Norway is also not under the kind sanctions that are hampering Russia’s economy, though losing the Russian market for its third biggest export, salmon and other seafood, due to a retaliatory ban imposed by Russia in reaction to those sanctions has no doubt been problematic for Norway.

In short, it seems that the depressed oil market isn’t a likely to trigger in Norway the same kind of economic turmoil – and potential political instability – that Russia might be facing.

There’s been much talk about how Vladimir Putin’s reelection in 2018 depends on maintaining an economy healthy enough to keep the Russian people happy. Presumably, keeping the electorate happy in Norway, often rated as one of the happiest countries on Earth, is a much easier task.

In all seriousness, though, I don’t think anyone would think the geopolitical effects of the oil glut on Norway, a small, stable, prosperous country, are anywhere as worrisome as what the bottom falling out of the oil market could mean for a large, somewhat hard-pressed nation like Russia.

Interestingly enough, Finnish TV has recently started broadcasting a miniseries from Norway called Okkupert (“Occupied”).

The premise of this political thriller is that Norway, having developed the technology to harness an unlimited amount of power from a fictional element called Torium (named after Thor!), intends to unilaterally shut down its North Sea oil rigs and share the new technology with the world, all in the name of a future free of fossil fuels. This doesn’t sit well, however, with the powers that be within the EU, which shockingly enlists Russia to do the dirty work of invading and occupying Norway in order to keep the crude flowing.

It's farfetched, as thrillers often are. Only the second episode has aired so far, so we don’t yet know whether the forces of green energy or black energy will prevail in the end. 

Meanwhile, it’s safe to say that the oil glut crisis in the real world, though harsh enough on some economies, will not likely lead to high drama worthy of a thriller. Well, not in Norway anyway.  

High Gas

Some recent news from the States has made me think of a time back at the end of 2007 when my sister came over from Georgia for a visit. 

We were returning from showing her something of Helsinki when I stopped to fill up our smallish family-sized car (seats six), which was down to about a quarter of a tank.  My sister offered to pay for the gas, though we’d only been doing normal driving, nothing really extra on her account.  I appreciated her offer, but refused. 

The reason was that, as an American unfamiliar with Finnish gas prices, she didn’t realize what she was offering.  It didn’t make sense for her to pay so much, just because we had driven her around a bit.  That perfectly routine fill-up, as I recall, cost 80 dollars.  For 10 gallons of gas.  Eight-dollar gas is pretty normal for Finns, but not so much for Americans. 

The average price of gas here has gone up even more in the four years since my sister’s visit and is now almost $9 a gallon.  Even that price is deceptively low, in dollar terms.  If the euro weren’t currently weaker than it was in December 2007, the price would be more like $10.50. 

Prices like that make it easy for us in Finland to find reports of folks in the States becoming almost apoplectic over the prospect of five-dollar gas almost amusing.  To paraphrase Dustin Hoffman in “Wag the Dog”:  “Five dollar gas?  That’s nothing!  That is nothing!” 

That European gas is expensive is well known in the States, and may be one more reason some Americans are chilled to the bone when politicians like Mitt Romney evoke the specter of the US turning into – God forbid – “Europe”. 

And it’s probably also well known that this price gap is largely due to taxes.  Take for example, my home state of Georgia.  The current tax on a gallon of gas in Georgia seems to be 29 cents.  Compare that to an equivalent of $3.30 in tax that Finnish motorists pay per gallon, over 10 times more.  Strip away the tax, and the price of gasoline here is only one and a half times the current US price. 

Like most Europeans, Finns are used to high gas and are, in fact, luckier than many others, such as the Italians or the oil-rich Norwegians, who are now reportedly paying a dollar more per gallon than the Finns.  I was recently in Portugal, where we noticed gas prices were about the same as in Helsinki, despite Portugal’s generally poorer economy and lower incomes. 

It seems to me that Finns are quite tolerant of gas prices that in America would almost spark a revolution because, unlike Americans, most Finns see car ownership or cheap fuel as nice to have, but not essential for life itself. 

It’s no secret that government tax policy here is designed to “shape” the behavior of drivers, and it seems to have some effect.  Most middle-class Finnish families have one or two cars, but not more, unlike in the US where on average every family member with a driver’s license has their own vehicle to go with it. 

Those with cars here are also not as quite as impulsive about using them as Americans are.  They’re not in the habit of hopping in the family SUV to drive three or four blocks to buy a gallon of milk.  In our family, we tend to use our two cars more prudently than I would have back in the States. 

Not that we completely deprive ourselves of gas-powered conveyance.  Between daily commuting, shopping trips, and hobby transportation, we certainly get enough use out of our cars, though we do try to avoid really useless trips and combine errands as much as possible.   If we need to run to the store just to pick up an item or two, we usually go on foot (a five-minute walk to the neighborhood grocery) or by bike, or do without until the next day.  Many people here would do the same as a matter of routine, though eight-dollar gas probably does reinforce this eco-friendly mindset. 

I don’t want to sound too smug about it (or Pollyannaish), but I tend to think the higher gas tax is fine.  Any incentive to use less fossil fuel can’t be all bad.  It might not even be necessary, in the case of Finland, where many people’s driving habits might have more to do with their inclination towards a more natural lifestyle than the gas price itself. 

Also, it helps that in Finland, like elsewhere in Europe, there are alternatives to the car.  I wouldn’t say the public transport here is perfect.  For example, when I worked at Nokia a bus commute required two transfers, and took twice as long as driving.  And Finland, like America, has some pretty remote countryside, where bus service is much more limited. 

Still, in Helsinki the bus is often very convenient, especially for trips into town.  A day or two ago, I offered to drive my daughter to my son’s place downtown for a visit, but she refused, choosing to take the bus instead.  There’s no stigma attached to riding the bus, even for teenagers.  Everybody does it sometimes. 

But in the States, the car is king, public transport poor (and mainly for the poor), and a tax, just tax mind you, of $3.00 a gallon would be seen as draconian, cruel even, and practically socialistic.  It’s no great insight that the economic life and lifestyle of Americans have been based on cheap gas. 

If you ask me, they’ve been spoiled – not that this makes higher gas any less devastating for families trying to recover from the Great Recession.  (GOP candidate Rick Santorum has even been claiming lately that high gas was the real cause of the Great Recession.)

I’ve heard that in Iran super cheap gas helps make up for the shortcomings in the political life of Iranians, and it’s tempting to think something similar of the US.  Like “bread and circuses” in ancient Rome, could cheap gas in America be helping to placate a disaffected citizenry? 

Okay, maybe that’s going too far.  But it sometimes seems that way when you consider the distress over the recent spike in gas prices, which has been cited as a new threat to President Obama’s re-election, despite the gradually improving economy.  Gas is that important to US politics.  When the US energy secretary dared to suggest that, in the face of rising prices, greater fuel efficiency should be the country’s goal, not cheaper gas, Newt Gingrich demanded his resignation. 

I doubt Obama’s critics really think he can personally “control” the price of oil (as Stephen Colbert hilariously implied he could do with a single phone call to “the oil companies”).  Still, that doesn’t stop them for blaming him for not opening up every square mile of American landscape to further oil drilling or doing whatever else they think necessary to preserve the God-given right of Americans to cheap gas.