Crude dynamics






According to influential commentators like Niall Ferguson, the celebrated financial historian and Harvard University professor, the abundant availability of indigenous energy could spark a new economic “golden age” for the US. Uninterrupted supplies of relatively cheaper, and less price-volatile, fossil fuel could galvanise the US manufacturing sector into creating millions of new jobs. With its productivity advantages, coupled with a gradual convergence of manufacturing wages between developed and fast-growing developing economies, the US could also start becoming attractive once again as a global manufacturing hub, according to Mr Ferguson.


The replacement of imported fuel and the infusion of domestic energy in the US economy will have implications for the US dollar as well, according to this line of reasoning. According to forecasts by Deutsche Bank, reduced energy dependence would cause the US current account deficit to fall 30 per cent by 2016.

By virtue of these developments, the value of the greenback will appreciate, which will provide an added impetus to declining world oil prices. The possible reduction of geopolitical risk in global energy markets as a result of America’s energy ‘independence’ resulting in a weaning away from the volatile Middle East, could trigger a sharp reversal in the international oil price. (This scenario assumes, however, that Saudi oil production has not ‘peaked’ between now and then). By some expert reckoning, the geopolitical risk in current oil prices ranges anywhere from $20 to $30 a barrel.

Such a large reduction in the oil price, should it occur, will exact a heavy toll on the budgets and economies of Middle Eastern oil producers. Given their demographics, most of these countries will need to continue ‘pump-priming’ their economies for the next decade at least to create jobs and provide social safety nets. The potential loss of oil income could be a devastating blow to their economies — and for millions of migrant workers who send billions of dollars in remittances to their respective countries.





Comments (3) Closed

Tribal Manto
Nov 30, 2012 07:11am
foresightedness and vision has a key role in the development of nations. US is a superpower in the true sense of the word. Her reliance on indigenous resources will make her more stronger in the coming decades. The developing nation can emulate USA, in this regard.
Nov 30, 2012 11:40am
Add to this the huge shale oil and gas reserves in China and India where exploration will commence soon.
Nov 30, 2012 08:49pm
US's oil independence in the long run may not necessarily trigger a significant decline in oil prices. The usual response of OPEC to lower demand for oil has been to cut production in order to maintain a higher equilibrium price. It would be interesting to see the dependence of OECD and developing countries in contrast to the OPEC share of global production.