Chea­per Oil Isn't the U.S. Boon It Used to Be

L'Opinion - - Protection Sociale Des Indépendants - Paul Kier­nan

The U.S. eco­no­my’s re­la­tion­ship with oil is chan­ging.

In the past, when the U.S. im­por­ted most of its ener­gy needs, de­cli­ning oil prices were a boun­ty to hou­se­holds and bu­si­nesses. A rule of thumb was simple: Oil­price drops boos­ted U.S. eco­no­mic out­put.

That’s be­come more com­pli­ca­ted. As the U.S. has ri­sen to be­come the world’s lar­gest oil pro­du­cer this year, a gro­wing chunk of do­mes­tic in­vest­ment, ma­nu­fac­tu­ring out­put and em­ploy­ment has be­come tied to oil. Now, when oil prices fall, it risks hur­ting in­vest­ment and hi­ring in im­por­tant parts of the eco­no­my.

At the same time, a de­ca­des­long tran­si­tion to­ward more ener­gy-ef­fi­cient li­ving has left bu­si­nesses and consu­mers less sen­si­tive to prices at the pump, mea­ning they don’t be­ne­fit as much when prices fall.

Some eco­no­mists still be­lieve lo­wer oil prices are a net eco­no­mic po­si­tive, but the re­sur­gence of the U.S. oil in­dus­try has upen­ded the conven­tio­nal wis­dom held by ma­ny, in­clu­ding Pre­sident Trump, who has re­cent­ly is­sued a flur­ry of tweets cal­ling for even chea­per crude.

“Oil prices get­ting lo­wer. Great! Like a big Tax Cut for Ame­ri­ca and the World. En­joy! $54, was just $82. Thank you to Sau­di Ara­bia, but let’s go lo­wer!” Mr. Trump twee­ted on Nov. 21.

Oil com­pa­nies, set­ting ca­pi­tal-ex­pen­di­ture plans for the next year, could be spoo­ked in­to cut­ting bud­gets if prices keep sli­ding. Crude oil fu­tures have lost a third of their va­lue in less than two months. “He’s li­ving in the old world,” Ian She­pherd­son, chief eco­no­mist at Pan­theon Ma­croe­co­no­mics, said of Mr. Trump’s com­ments in recent weeks chee­ring the price de­clines. “That’s the ve­ry last thing he should be wi­shing for.” In the past, the U.S. oil in­dus­try fo­cu­sed on the Gulf of Mexi­co, where mas­sive deep-wa­ter wells re­qui­red large up-front in­vest­ments that pum­ped vast quan­ti­ties of oil for a de­cade or more at re­la­ti­ve­ly low ope­ra­ting costs. Out­put was do­mi­na­ted by big com­pa­nies such as Exxon Mo­bil Corp. and Royal Dutch Shell PLC, which car­ried lit­tle debt.

As a re­sult, ener­gy in­vest­ment was re­la­ti­ve­ly un­res­pon­sive to short-term price fluc­tua­tions, while a drop in ga­so­line prices im­me­dia­te­ly left consu­mers with more cash to save or spend on other goods and ser­vices. Then the equa­tion chan­ged. Fuel-ef­fi­cient ve­hicles and a long tran­si­tion away from hea­vy in­dus­try mean the U.S. eco­no­my now consumes just 0.4 bar­rels of oil to pro­duce $1,000 of gross do­mes­tic pro­duct, down from 1.1 bar­rels in 1972, said Mar­tin Stuer­mer, a se­nior re­search eco­no­mist at the Dal­las Fed.

In contrast to the Gulf of Mexi­co’s hey­day, most U.S. oil no­wa­days is ex­trac­ted from a vast num­ber of com­pa­ra­ti­ve­ly ti­ny de­po­sits trap­ped in shale rock.

Since wells are ex­haus­ted qui­ck­ly, the pro­cess re­quires near-constant drilling by a cons­tel­la­tion of smal­ler com­pa­nies that, com­pa­red to the tra­di­tio­nal oil ma­jors, use a lot of debt. This makes both pro­duc­tion and in­vest­ment sen­si­tive to lo­wer prices, which can lead to sud­den ban­krupt­cies or de­clines in cash flow that squeeze in­vest­ment plans. Large shale-oil com­pa­nies, such as EOG Re­sources Inc. and Whi­ting Pe­tro­leum Corp., have cha­rac­te­ri­zed the cur­rent price around $50 a bar­rel as an in­flec­tion point, be­low which they would re­duce drilling.

“If oil went down to $40 and stayed there, yes, you would see a re­duc­tion in [spen­ding] and a re­duc­tion in U.S. pro­duc­tion growth,” said Ch­ris Wright, the chief exe­cu­tive of Li­ber­ty Oil­field Ser­vices Inc., a hy­drau­lic frac­tu­ring com­pa­ny that works for oil pro­du­cers. Eco­no­mic da­ta from the last big down­turn in oil prices re­flect the new dy­na­mic. Months af­ter oil prices be­gan fal­ling from their mid-2014 peak of $105 a bar­rel, drilling slo­wed. By late 2016, pri­vate in­vest­ment in oil and na­tu­ral gas ex­plo­ra­tion and wells had fal­len by two-thirds, and the oil-and-gas in­dus­try had shed near­ly 190,000 jobs.

The ne­ga­tive ef­fects of the price down­turn were most acute in oil-pro­du­cing re­gions like Texas and North Da­ko­ta, but na­tio­nal mea­sures of bu­si­ness in­vest­ment slo­wed, too, and ove­rall ex­pan­sion of GDP sput­te­red.

It’s still dif­fi­cult to map the com­plete foot­print of oil in the U.S. eco­no­my. The Bu­reau of Eco­no­mic Ana­ly­sis es­ti­mates bu­si­ness in­vest­ment in pe­tro­leum and na­tu­ral gas struc­tures at $137.48 bil­lion an­nual­ly. While that’s less than half of what consu­mers spend on ga­so­line and mo­tor fuel – $324.51 bil­lion – it in­cludes none of the homes, hos­pi­tals and strip malls that pop up in re­gions that pump oil.

“A de­cline in oil prices now has ne­ga­tive spillo­vers to U.S. ag­gre­gate in­vest­ment,” said Ni­da Ca­kir Me­lek, an eco­no­mist at the Fe­de­ral Re­serve Bank of Kan­sas Ci­ty. Jo­seph Ja­quez, who runs his fa­mi­ly’s store, Air­lawn Fur­ni­ture in Pe­cos, Texas, said the oil boom crea­ted a wind­fall for his bu­si­ness in the heart of the Per­mian ba­sin when thou­sands of wor­kers flo­cked to the area. His sales of mat­tresses boo­med to the tem­po­ra­ry hou­sing fa­ci­li­ties that pop­ped up in town. “Our si­tua­tion here in town is not one that ma­ny people can com­pre­hend,” Mr. Ja­quez said. Mr. She­pherd­son, the eco­no­mist, said it’s not a coin­ci­dence that the 2014-16 per­iod of fal­ling oil prices was fol­lo­wed by a mar­ked slow­down in broa­der eco­no­mic growth.

The recent price down­turn, he es­ti­mates, will sub­tract 0.3 per­cen­tage points from U.S. GDP growth over the next year or so.

SI­PA PRESS

The Shell Deer Park oil re­fi­ne­ry, in Texas.

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