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February 10, 2015 at 11:26 AM
On the tails of the oil crash, Michael A. Levi addressed a number of myths he’s found to be widely believed.
Levi — director of the Council on Foreign Relations program on energy and security and director of the Maurice R Greenberg Center for Geoeconomic Studies — recently spoke at the New York for the IMCA 2015 New York Consultants Conference.
Myth No. 1: Cheap energy will drive U.S. manufacturing.
“The first myth I want to talk about is this idea that cheap energy is bringing industry back home in a big way, and it’s a pretty popular view,” Levi said.
There are a lot of industries that use energy — steel, cement, aluminum and any kind of manufacturing. And because the U.S. had a crash in natural gas prices while Europe and Asia face far higher prices, to some it may seem that the United States has grabbed a decisive advantage in manufacturing.
“The reality is that for most industries,” Levi said, “even for most of these energy-intensive industries, the energy cost is rarely what’s pivotal.”
According to Levi, only a small percentage of U.S. manufacturing has more than 2% of its costs come from energy. Large parts of the manufacturing industry are not particularly energy intensive, he said.
“Even if you take energy costs to zero, there’s only so much of an advantage you can get,” Levi said. “Particularly when you think about the other inputs that matter: capital costs, land costs, in some cases labor costs and then the transportation costs if you’re going to try and compete in overseas markets.”
Myth No. 2: No one saw the oil crash coming.
“If you believed that it wasn’t coming, it probably had something to do with this guy,” Levi said showing the crowd a photo of Saudi oil minister Ali al-Naimi. “If you asked people a year ago, what will happen if there is a lot more production than there is consumption? If U.S. supply is doomed? They would say, ‘This guy will stop the price from falling. Saudi Arabia will cut its production and that will balance [it]. That’s what Saudi Arabia is there to do.’”
Or, Levi said, maybe those people would point to OPEC, thinking the oil producers’ group would cut production to keep prices high.
“The reality is that OPEC and Saudi Arabia haven’t fine-tuned the oil market for a long time,” Levi explained.
As an example, Levi said, look back to 2008.
“As the economy collapsed and oil prices fell to $100, $90, $80, $70, $60 a barrel, OPEC decided they weren’t going to do anything,” Levi said. “It fell to $50, they tried and they did not stop the price from falling.”
Levi said that only when prices got to $30 or $40 a barrel did Saudi Arabia and others in OPEC cut production so decisively that, combined with the response from the rest of the world, the price of oil reacted.
“So if you looked at how these countries made decisions and what they did in the past, you wouldn’t be too shocked,” Levi said. Myth No. 3: OPEC is dead.
Levi described OPEC’s meetings as “they deliberate on what their quotas will be — their quotas usually track their past production rather than predicting it — and after these meetings not much actually happens in their production.”
“The market does what it will do, and so some reasonably conclude now that OPEC is dead,” he said.
Levi, though, made the case that OPEC is still thriving.
“This is essential to remember: Just because OPEC does not control or influence short-term price fluctuations does not mean that Saudi Arabia and other OPEC members do not have a lot of influence over longer-run developments and prices in the global economy,” Levi said.
