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Wednesday, January 13, 2016

No, cheap oil won't hurt us.

My blogging buddy suggested that I explain why I view the recent decline in oil price to be good not only for consumers but for the nation. First the obvious. The less the typical American has to spend on gasoline and heating oil or natural gas the more money he has to spend on other things. There is a certain carping on CNBC that the consumer is sitting on those savings rather than spending them, ergo falling energy prices have not buoyed the economy as one would have expected nevertheless auto makers sold 17.5 million cars and light trucks in the U.S. last year, a 5.7% increase, besting an all time high set 15 years ago. I'm more inclined to credit the recent decline in fuel prices for this than the ongoing Fed policy the nation has endured for the last 7 years.
Second, from a partisan viewpoint, anything that make green energy more expensive compared to conventional energy sources is a positive good. In Obama's world we would all be riding high speed rail trains to nowhere with a few of exceptional individuals driving Chevy Volts, eating green leafy vegetables and shooting up with clean needles in gun free zone so as not to overburden Obamacare. Furthermore neither Donald Trump nor anyone else can make American great again with crude at $90 a barrel. A supply of cheap energy fueled America's growth and it more than coincidence that the loss of manufacturing jobs accompanied higher energy prices through the Bush years.
Third, who is to say prices are too low or too high? Yes, markets are messy but they are brutally efficient. You don't like brutal? Consider the compassion of FDR. Farm commodity prices were at historic lows during the great depression. Since about a third of the nation lived on farms at that time the solution was to drive up the prices of everything from raisins to butter, from corn, wheat, and soy beans to apples and oranges never mind that urban dwellers were already living on the verge of starvation. Now there is compassion! To compound the evil the farm price supports and market orders remain in effect today nearly a century after the supposed need has passed and they corrupt honest people like Marco Rubio who craves sugar subsidies.
From a provincial point of view while 36 oil and gas have recently filed for bankruptcy none of them have been in the Utica / Marcellus Shales. Magnum Hunter Resources is in a virtual ICU but still clings to life. A few years ago I wrote a post on America's most reckless billionaire, Aubrey McClendon. In that post I noted that one common thing all of the legendary oilmen from H.L. Hunt to Sid Richardson, to T.Boone Pickens to McClendon had in common was an appetite for risk. You pay your money and you take your chances. Energy development is still the rough, tough business it was 100 years ago. No one gets a medal just for showing up. The 36 companies that have folded have only about $13 billion in cumulative secured and unsecured debt so fears that failing oil prices will play havoc in the junk bond market so far are exaggerated.
Almost 45 years ago we cried at the rise of OPEC now today we are mourning it's demise. WTF! Saudi Arabia has reverted to doing what it did prior to 1973, that is pump all the oil it can but today we view that as a threat to our own energy industry and even to world order. Finally, after almost a half century the OPEC cartel has lost it punch and we fret? Saudi Arabia didn't kill our domestic oil industry when it was selling crude a $3 a barrel and there is little reason to think it can now. In the meantime it has made a fine mess of the balance sheet of Venezuela, Russia, and Iran. Bring it on!


  1. Good analysis! I was thinking if our government would allow more exports it would make a difference to US companies. Instead he's committed US resources to helping Kenya start their own pipeline because global warming. It'd be nice if he had AMERICAN interests in mind once in a while instead of being an advocate for BRAZILIAN interests in oil.

    1. I see the decline in the stock market and oil prices to be coincidental. I don't how exporting oil into a worldwide glut will change much. Not so with CNG. At present we have only 1 export facility complete and even if we had 6 working at capacity it wouldn't be enough to turn this failing economy around.

  2. I never thought that in my lifetime we would see gas prices hovering around one dollar again. When gas was over four dollars, we would joke about the abandoned gas station in town that still has the 99 cents sign. This month we could be closer to that price than i can remember. I believe that you can never say never about anything, you just never know!!!

    Shayne Gustafson @ Berico Heating and Air