There are specific protocols to be followed in revealing the identity of a Secret Santa. In some groups, in fact, the names of the donors are meant to be held secret forever. In almost all cases, it is considered bad form to identify a Secret Santa before the gift giving is done.
It is fitting, though, that as the year comes to a close we reveal the source of a particularly welcome gift. This year, the U.S. economy’s Secret Santa was OPEC, the Organization of Petroleum Exporting Countries.
Federal stimulus plans and the bailouts got all the headlines. But the biggest single boost to the U.S. economy in 2008, the one thing most responsible for keeping things rolling, came from the 13 countries of OPEC.
This is not to say that our government’s efforts to defrost the financial system, lower interest rates, prop up banks and insurance companies and rescue the auto industry were not effective. But OPEC put money right in our pockets, and from an economic stimulus perspective, that’s where it counts.
Early in December, the Global Insight organization estimated that the drop the average gasoline prices per gallon from a high of more than $4 to its current level of $1.70 represented a total savings of $230 billion for American consumers. And it was $230 billion in the sweet and now. We didn’t have to wait around for a broody Congress to contemplate the issue or for banks to decide what our monthly payments would be.
The gifting may not be completely over. Crude oil prices continue to decline, and gasoline prices at the pump are following closely. Some economists are even predicting that the price of crude oil will plunge below $25 per barrel, a level we haven’t seen in many years.
Is this all part the spirit of giving from OPEC? Not at all. In fact, OPEC is an unenthusiastic Secret Santa and has been doing its best to halt the slide in prices, which is what we would expect from an oil cartel. The economics of cartels, though, and OPEC’s past experience, suggests that the method they are using will probably be ineffective. This will result in unhappiness for the OPEC member countries, but what that will lead to is anybody’s guess.
The history of OPEC is certainly a factor, at least in our understanding.
In 1959 the United States imposed import duties on oil, and in a premonition of NAFTA gave preferential treatment to Canada, Mexico and, somewhat later, Venezuela. The Organization of Petroleum Exporting Countries was formed shortly thereafter, undoubtedly as a response to the U.S. action. The potent mixture of oil economics and oil politics began to ferment.
A lot of things have happened since then. We have become a lot more dependent on imported oil. We still get most of it from Canada and Mexico but its price is now driven by OPEC, which accounts for about 40 percent of world production.
And our relationship with OPEC is still … well, complicated. And some anomalies remain. Even though the cartel is dominated by Middle Eastern countries, for example, Venezuela was one of the founding OPEC countries, and shares substantial oil interests with the United States.
What we know about cartel economics is that they are not always effective in controlling price when demand declines. On Dec. 17, for example, OPEC announced it was making a record cut in production that would lower its total output to 24.8 million barrels a day — the lowest since 2004. If that had any effect on oil prices, it was not visible. Crude oil prices for January deliveries continued their descent to $40 a barrel — perhaps not coincidentally, also the lowest we have seen since mid-2004.
One reason cartels have trouble when demand is falling is simple: the members cheat. Individual countries find themselves facing income losses and budget deficits just like everybody else. They calculate the risk of getting caught and find that cheating — producing and selling more than the amounts set by the cartel — is an effective way to make more money.
The more important economic lesson, though, is that for all economic enterprises, whether private or nationalized, free-market or cartel, the supplier cannot in the long run be healthier than its customers. Oil prices will continue to be low for as long as the global economy is in recession. Then, as the global economy recovers, oil prices will again rise.
For now, though, this is the season to enjoy our Secret Santa’s gift of lower oil prices. The additional money in consumers’ pockets isn’t enough by itself to turn things around, but it is a most welcome bright spot in our troubled economy, a reason to take heart.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.
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