US Once Again the Swing Oil Producer: Whither Gas Prices?
Despite a collapse in oil prices of 50 percent since summer’s end, Saudi Arabia, whose vast production capacity has enabled that country to modulate world oil prices by adjusting its output, “effectively resigned from that role,” Daniel Yergin wrote in this past Sunday’s New York Times Week in Review. “…OPEC handed over all responsibility for oil prices to the market, which the Saudi oil minister, Ali Al-Naimi, predicted would ‘stabilize itself eventually.’”
For those unfamiliar with Yergin, since at least the late 1970s, he has been a leading expert and author on oil and its intersection with international economics and politics. He writes that the Saudis’ motivation for relinquishing control—a decision which was far from unanimous among OPEC nations—included fear of losing market share if they turned off the spigots, particularly to Iraq, which they view as a satellite of Iran, and to Iran itself, should sanctions end, bringing that country’s million-plus bbls/day back onto the market.
Now, Yergin writes, the US, long ago the “swing producer” of oil, has been granted that status once again by virtue of Saudi Arabia’s abdication.
The US “was once, by far, the world’s largest oil producer and exporter,” Yergin writes. American production peaked in 1970 at 9.6 million barrels a day, but by 2008, had fallen by nearly half, while oil prices had climbed to $147/bbl (raising the specter of peak oil).
Then, technology came to the rescue, in the form of fracking and horizontal drilling. In 2010, writes Yergin, these nascent gas-harvesting technologies were unleashed upon oil, and by 2014 brought American oil production most of the way back to the 1970 peak. That, and slowing world economic growth brought prices from the stratosphere back down to more terrestrial levels of less than $50/bbl.
Yergin expects shale oil producers to find ways to “drive down costs” so that even if oil prices stay well south of $100/bbl, shale oil production will remain strong. He doesn’t speculate what prices will do beyond 2016, short of saying a growing economy may stimulate more demand. (We were unable to reach him for comment, as he was traveling overseas.)
Providing additional perspective in a New York Times “Upshot” column, the NYT’s David Leonhardt says the current nationwide average price of gasoline, $2.03/gallon, is actually more expensive than at anytime during the 1990s. From 1986 through 2002, the inflation-adjusted cost of a gallon averaged $1.87.
Nonetheless, if maintained, the current low fuel cost could lift some financial burden from the middle class on down. Leonhardt notes that political leaders from President Obama to three likely presidential candidates—Hillary, Jeb Bush, and Scott Walker “consider the wage slowdown to be the country’s most pressing issue.” The wage slowdown refers to the fact that American middle class wages have been so stagnant for the last several decades that our middle class is no longer the world’s most affluent.
Leonhardt asserts that energy costs were a major factor behind the wage slowdown. He writes that the beginning of the wage slowdown coincided with the end of cheap gas. But if gas prices hold to current levels, Americans will have an additional $180 billion their accounts this year, he says (that’s about $562 per capita).
(But maybe energy is not such a major factor: the $180 billion represents less than 1.5 percent of personal income. Tufts economist David Dapice blames the wage slowdown more on rising medical costs, globalization and the breaking up of unions, and slack in labor markets. And Harvard economist George Borjas says mass immigration takes a 3-4 percent bite out of income.)
But if gas remains cheap, rising demand could boost prices. Leonhardt notes in the early ‘80s, CAFE helped dampen demand for fuel. In the mid-‘80s, the best selling vehicles were the Chevy Celebrity, Honda Accord, Ford Escort, and Ford Tempo, “all modest size,” writes Leonhardt. But by the cheap oil era’s end, in 2002, the CAFE truck loophole had catapulted the Explorer, the Trailblazer, the Silverado, and the Ram to the top (See Derek’s article on that loophole.)
“Left to its own devices, the energy market will repeat this cycle,” Leonhardt warns, adding that SUV and pickup truck sales in December 2014 had risen 12 percent over December 2013, compared to just 5 percent for cars.
Avoiding this cycle is the logic behind taxing either gasoline or carbon enough to dampen demand, and rebating at least some of that money to consumers, in the form of tax cuts, as Larry Summers and Charles Krauthammer both advocated, and as the Energy and Enterprise Institute has been promoting. Thus, the external costs of both could be internalized without harming the economy.
I'm a freelance journalist covering science, medicine, and automobiles.
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Al, (started a new thread for convenience) I said I meant no offense, and honestly, I don't get the offense. It seemed like a reasonable acronym, and even after your obvious irritation, I am unaware of the source of the irritation. I accept you don't like it so I stopped using it, and you don't have to explain it because I am aware that just feeds the fire. This seems to be a typo, "I'm disappointed in who and what you value and aspire too." Im not at all sure what you mean. What, in your imagination, are my aspirations? Why would you write that? I could empty a thesaurus describing the statement, the author, the lack of civility, the hubris, etc. To the discussion: Your consumer bias is antithetical to a free market. Accurate pricing information, required for the best allocation of resources, requires fairness for both sides. The US courts have a consumer bias that often leads to inefficiencies which is often balanced by laws that protect the sellers inappropriately. The result is not a balance at all. It's inefficiency in one case and inefficiency in another. Luckily, its better than just about any previous system and not awful. Also, I think your romanticism of the consumer is missing a necessary point. Its hard to explain, but while a consumer always adds value to the system at each transaction, there has to be a net gain in value creation over the system or it fails. Your caveman did not just consume, he had to work for everything. Even bopping the neighbor over the head and taking his goods is work of a sort. It would be wonderful if everyone were a benevolent player in the world, but that's just not so. Your ideas sound wonderful, but fail in practice. If you allow people a free ride, many will take it. If you offer them a discounted ride, many will as well. If you set a minimum wage to ensure the fellow consuming labor pays a wage that is not exploitive, fine. If you set a wage based on a consumption level, you just offered a discounted ride to a whole slew of workers while disenfranchising others. All too many will now favor the minimum wage job where they can trade less value than they will receive in compensation. They will, in error, assume a future where these jobs are always there and lose all ambition for the work place.Its been decided its all fair, even though it clearly is not. By the way, you didn't get rid of unions in the process of your new wage deal, so the unions will now fight to provide less value for more wages also. Its only fair if I offer 30% more value than the minimum wage guys that I get 30% more pay. Of course, this is a union talking so its really 10% more value, but they have data to prove the 30% for sure. Why should I as a minimum wage person on a livable wage do what it takes to earn more? We already have millions who stay at minimum wage jobs as it is. The idea that there is no opportunity is bunk. Anyone capable of flipping burgers is capable of moving up. The reality is that complacency and foolishness are what keep the small minority of people in minimum wage jobs. Paying them more just warps the market. Also, back to that disenfranchised worker. You cut him out of the market before he even got started. Great. We have wonderful charities to teach challenged people to be workers, and now we will need more to fill the gap between what public education provides and employers demand for the new wage. How efficient. Now, your idea that we will eliminate government jobs by paying a higher wage is just pollyanna-ish. We all know better. The minute the law is passed, the cheats start working around it, the workers start crying foul, and the interlopers start the next round of entitlements. We all know the savings will be totally theoretical and never realized. Plus, we now move some workers off welfare to EIC. Others will lose some, but not all benefits. And, still others will now lose their jobs and need more aid. I can here the testimony from the Department of Redundancy Department on why they need a budget increase already. I I have no idea where your $3,000 thing comes from, but I suspect its one of those "subsidies" that aren't really subsidies. Trickle up isn't any better than trickle down if the source of the funds is not value creation at fair market value. Setting an artificially high minimum wage will not give you a free lunch. TINSTAAFL. I am with you on no handouts to industry, but not on government price fixing. We have way too much meddling in the labor market by government now. Lastly, a government with big rules is not a small government just because you lay off a few guys and delete a few paragraphs. Its a lot easier to write the rules for despotism than democracy.
Shaker, Another new thread to respond to you because this page is about done due to convolutions. At least I can't find anything. The most ecologically safe place to drill is shallow water off of prohibited beaches that are only sensitive because the stake holders are jerks. Legal and political issues keep this oil from being tapped or even searched for. People who hate oil, and hate progress, and hate fairness will ensure that the rest of us cannot get the value from federal lands because they don't want a dollars risk from production on land they don't own and can only see from their property or their public beach.