The Cheap Oil Gift-and-Curse

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Vladimir Putin, trying and failing to stare down a currency crisis. Photo: Alexei Nikolsky/Getty Images

Santa has come early for the American commuter this year, bearing the gift of cheap prices at the pump.

The plunge in the value of crude has filtered through to gas prices in the United States, with the average price of a gallon of unleaded dropping to $2.52, down from $3.24 a year ago. That means a lot of money left over in average families’ pocketbooks — especially the lower-income suburban and rural families that spend a disproportionately large amount filling up their tanks.

But markets are not exactly applauding. The price of a barrel of oil extended its drop overnight, and the Dow was down at the opening bell this morning. And despite the surge of consumer spending the drop in gas prices should encourage — and during the holiday season, no less — the Standard & Poor’s 500 has fallen about 2.5 percent over the past month.

That is because along with these cheap gas prices has come a huge lump of coal in the form of currency and commodities volatility. With the price of oil below $60 a barrel, countries that rely on oil production have taken a massive hit. At these levels, many OPEC producers are officially in the red — even Saudi Arabia is pitching toward a deficit.

Worst off of all is Russia, hit hard by European and American sanctions for its incursion into Ukraine as well as the drop in the price of crude. The ruble has lost about 50 percent of its value this year. Inflation has spiked. Gazprom, the state-owned oil giant, is reportedly contemplating firing a quarter of its staff. The economy is shrinking, and fast. To help staunch the bleeding and keep money in Russia, last night the central bank hiked its main deposit rate to 17 percent.

Those are the actions of a country in the midst of a currency crisis, not just a recession, and the problem is that solving one might mean worsening the other. If you offer investors 17 percent to keep their money parked in the bank, what incentive do they have to spend it?

Even worse, it looks like the central bank’s gambit might not be working out, with the country throwing billions of dollars at investors only to see them continue to flee the country and its currency. “Our traders are informing me that we see no bids to buy rubles,” Per Hammarlund of Skandinaviska Enskilda Banken told Bloomberg. “I thought 17 percent would give them at least a month of breathing space. We next have to look at the experience in 1998–1999. We are also one big step closer to capital controls.”

Fun! Granted, the American economy has relatively few direct links with the Russian economy. It’s the broader threat of emerging-market instability, currency volatility, and financial contagion that has traders worried. And the classic signs of contagion are there. It’s not just oil exporters whose markets are gyrating. It’s importers, too, including the United States. And all the turmoil has led to a flight to the warm safety of gold and bonds, especially American and German bonds, which are yielding close to nothing.

Another reason that the drop in oil prices has not buoyed the market is a widespread belief that these deals won’t last and prices should boomerang back up again. The current sell-off is due to OPEC’s decision in late November to continue pumping oil despite the drop in prices. Why do that? In part, it’s a predatory-pricing strategy concocted by Saudi Arabia and aimed at stopping shale production in the United States. Saudi has a much lower breakeven price for oil than many American producers do. The idea is to drive prices down below that American breakeven point to dampen production, and then to allow prices to come back up. And many OPEC members want prices to come back up sooner rather than later.

That would stamp out the silver lining to all this market and geopolitical turmoil — the flush of cash for consumers around the world, especially us gas-guzzlers in the United States.