There's a rather silly article at Bloomberg that announces that the USA is losing the "oil price war" to the Saudis and the Russians, among others. It presents a rather myopic view of the world energy industry and then proceeds to explain how the Saudis are prepared to push oil down to $20 per barrel in order to wipe out American shale producers.
There really is no point recounting the entire thesis of the article, but it misses perhaps the most significant result of the major price decline in energy prices: the decline provides an enormous boost for American consumers and the American economy as a whole. Here are just a few facts to consider:
1. When oil sold at $100 per barrel earlier this year, the USA was sending cash abroad at the rate of a quarter of a trillion dollars per year to cover the cost of imported oil.
2. With the price of oil at $40 per barrel (which we are fast approaching), the cost of imported oil declines by $150 billion dollars per year.
3. The overall savings to American consumers for gasoline and oil based products is in the area of $300 billion dollars per year. That's roughly the equivalent of 2% of the GDP of the United States.
4. The production of shale oil across America generates only about 70 billion dollars of revenues when the oil price is $100 per barrel and that falls by about 40 billion dollars if the price is in the $40s per barrel range.
5. The net benefit to the US economy therefore of a major drop in oil prices is still more than $200 billion per year. On top of this there is a multiplier effect from all of this increase in cash in consumers' pockets.
Putting these facts together, one finds that while the drop in oil prices may wallop the oil industry in the USA, it will do wonders for helping the growth of the overall American economy. That means that the in the "oil price war" the big winner is the American economy. The European economy as well as those of Japan and China are additional winners in the "war". The losers are the countries of OPEC which will see their revenues shrivel almost to nothing. Iran or Venezuela need the cash from oil sales to support their citizens; neither country has much other economic activity which will see any boost from lower oil prices. The Saudis will need to call upon their reserves (which are substantial) to see themselves through this oil price decline, but even the Saudis have their limits. The Russians will see their major source of foreign exchange disappear at a time when other possible sources of foreign funding have vanished due to Russian adventurism in Ukraine and elsewhere.
Without a doubt, there will be major disruptions in the American oil industry. There will be bankruptcies and there will be folks who lose their jobs. Nevertheless, the benefits to the rest of the country will far outstrip any cost borne by the oilfield. When oil prices recover, the shale oil boom will not move nearly as quickly as it did in the past; companies will be hesitant to invest in marginal projects after seeing the losses that the latest price cuts brought. Nevertheless, all that oil (and gas) will still be there underground, and its presence will keep world prices from rising too high. This will mean that it will be much less likely that the USA will ever again face a prolonged period of very high energy prices.
There really is no point recounting the entire thesis of the article, but it misses perhaps the most significant result of the major price decline in energy prices: the decline provides an enormous boost for American consumers and the American economy as a whole. Here are just a few facts to consider:
1. When oil sold at $100 per barrel earlier this year, the USA was sending cash abroad at the rate of a quarter of a trillion dollars per year to cover the cost of imported oil.
2. With the price of oil at $40 per barrel (which we are fast approaching), the cost of imported oil declines by $150 billion dollars per year.
3. The overall savings to American consumers for gasoline and oil based products is in the area of $300 billion dollars per year. That's roughly the equivalent of 2% of the GDP of the United States.
4. The production of shale oil across America generates only about 70 billion dollars of revenues when the oil price is $100 per barrel and that falls by about 40 billion dollars if the price is in the $40s per barrel range.
5. The net benefit to the US economy therefore of a major drop in oil prices is still more than $200 billion per year. On top of this there is a multiplier effect from all of this increase in cash in consumers' pockets.
Putting these facts together, one finds that while the drop in oil prices may wallop the oil industry in the USA, it will do wonders for helping the growth of the overall American economy. That means that the in the "oil price war" the big winner is the American economy. The European economy as well as those of Japan and China are additional winners in the "war". The losers are the countries of OPEC which will see their revenues shrivel almost to nothing. Iran or Venezuela need the cash from oil sales to support their citizens; neither country has much other economic activity which will see any boost from lower oil prices. The Saudis will need to call upon their reserves (which are substantial) to see themselves through this oil price decline, but even the Saudis have their limits. The Russians will see their major source of foreign exchange disappear at a time when other possible sources of foreign funding have vanished due to Russian adventurism in Ukraine and elsewhere.
Without a doubt, there will be major disruptions in the American oil industry. There will be bankruptcies and there will be folks who lose their jobs. Nevertheless, the benefits to the rest of the country will far outstrip any cost borne by the oilfield. When oil prices recover, the shale oil boom will not move nearly as quickly as it did in the past; companies will be hesitant to invest in marginal projects after seeing the losses that the latest price cuts brought. Nevertheless, all that oil (and gas) will still be there underground, and its presence will keep world prices from rising too high. This will mean that it will be much less likely that the USA will ever again face a prolonged period of very high energy prices.
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