mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
Crude Economics
Good News and Bad News for US Shale

Which would you like first? Let’s start with the bad news. Falling oil prices—which have recently dipped below $60 for the first time in five years—are putting a strain on shale producers, many of whom won’t be able to profitably drill at these price levels. The Energy Information Administration cut its forecast for American oil production next year from 9.4 million barrels per day down to 9.3 million. According to the WSJ, retrenchment is already underway:

U.S. energy companies are starting to cut drilling, lay off workers and slash spending in the face of an accelerating decline in oil prices, which fell to a fresh five-year low Wednesday. […]

Another sign of the energy industry’s pullback: the number of rigs drilling for oil in the Eagle Ford Shale in Texas has started to drop. Drilling in the nation’s second most active oil region hit a peak of 210 rigs in July but recently fell to 190 rigs.

Permits for new wells dropped nearly forty percent in November, as the industry reacted to the continued price slide. This is the first major check to the shale boom’s momentum, and a reminder that America’s energy fortunes are not immune from events beyond our borders.

Now, on to the good stuff. Next year’s oil production forecasts may have dropped by 100,000 barrels per day, but we’re still producing near-record amounts of crude, and that’s having a very positive effect on the American economy. According to a new study from the Congressional Budget Office, the shale boom will boost American real GDP 1 percent by 2040, and two thirds of a percent by 2020.

Fracking is giving the U.S. economy a much-needed boost, and will continue to do so for decades to come. But there’s more good news: low oil prices are saving American consumers money at the gas pump, effectively encouraging spending ahead of the holiday season. The FT reports:

Store and restaurant sales were up by 0.7 per cent compared with October and 5.1 per cent from a year ago, in a sign that faster jobs growth and the rapid drop in petrol prices are boosting consumption. […]

“[The bear market] should provide a considerable boost to consumer spending next year, when we expect it to help drive the fastest rate of economic growth for a decade, [said Joseph Lake at the Economist Intelligence Unit.]”

So there you have it. Plunging oil prices are slowing the breakneck pace of America’s shale energy renaissance, but they are by no means stopping it, or the long-term economic benefits it promises. In the meantime, a lower price of oil is a decidedly good trend for the rest of the U.S. economy, as both businesses and consumers benefit from cheaper energy. It’s a good time to be alive, unless, of course, you’re a petrostate.

Features Icon
show comments
  • S.C. Schwarz

    Suppose Saudi Arabia is doing some deep strategic thinking here. Stay with me:

    1. Obama and the Greens would love to ban fracking completely and generally cripple fossil fuels as best they can.
    2. But if the USEPA had done something drastic a year ago the price of gasoline would have soared and the recovery been derailed. The recent electoral rout would have been even worse. Can’t have that.
    3. But now the price of oil is way down and likely to stay down for a while. If USEPA were to issue some tough anti-fracking rules, say in a year or so, the economic impact would be muted. The Greens could say, “Who needs fracking anyway? There’s plenty of oil.”
    4. Furthermore, cheap oil boosts the economy in general. improving the chances that another Democrat will succeed Obama. Again, good for Saudi Arabia as the Democrats in general are pro-Green and anti fossil fuels.
    5. And then in a few years, when oil and gas industry in the US is nicely crippled, it’s safe for OPEC to raise prices again.

    Note the regulatory ratchet effect here. If all these low oil prices did is suppress current high cost oil and gas production and exploration then that could be quickly reversed if and when OPEC raises prices again. But environmental regs, once in place, are never reversed.

    Am I being too conspiratorial here?

    • Andrew Allison

      Your thesis overlooks the fact that for at least the next two years both Houses of Congress will be controlled by the GOP, which has shown itself to be hostile to regulatory, and especially, EPA overreach. Even if there are not enough oil-patch Democrats in Congress to enable overriding a Presidential veto of legislation, Congress has tools at it’s disposal to influence regulation. The Supreme Court, where such regulation as you suggest would inevitably finish up, also appears to be getting a bit concerned about Executive Branch overreach.

      • S.C. Schwarz

        If only you were correct. Regrettably, regulatory power is in the hands of the EPA and short of amending the Clean Air Act there is nothing Congress can do. Consider how the EPA got into the business of regulating CO2 in the first place. Bush was President and he didn’t want EPA to regulate CO2, so EPA declined. A group of states (see Massachusetts vs USEPA) sued and won, and EPA had to regulate, hence where we are today. If EPA says that fracking exacerbates CO2 emissions, say because of increased methane leakage, and therefore has to be regulated, what can Congress do? And be assured, EPA can always find some tame scientists who will enthusiastically support whatever they want to do.

        • rheddles

          what can Congress do?

          Pass a law stating that CO2 cannot be regulated by EPA.

          • S.C. Schwarz

            Well, that’s another way of saying amend the CAA. First they have to overcome the inevitable filibuster in the Senate, or use the nuclear option. And then they have to elect a Republican president, or, even harder, overrule a presidential veto. But broadly speaking you’re correct: What Congress has to do is pass a law.

    • FriendlyGoat

      I’d call it conflicted. You are already worrying in (4) that cheap oil could boost a Democrat to succeed Obama. Good grief.

© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service