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Page added on October 20, 2014
Lower Oil Prices Are Unambiguously Good
Steep stock market corrections often create shrouds of pessimism that do bad things to people’s brainpower. And one of the absolutely stupidest things I have heard in recent weeks is that the recent drop in oil prices is bad. You heard me right. Serious people on financial television are saying lower oil prices are a signal of worldwide economic collapse. Here at home that translates to recession, deflation, a profits collapse, and rising unemployment.
I’ve been around for a while, and I’ve seldom heard such gibberish.
The latest stock market scare stems from a bunch of fears, like the possible spread of Ebola, economic slowdowns in Europe and Asia, and deflation worries. And when the stock market decides to correct, any reason will do. We must respect the wisdom of the market.
But the recent $20 drop in crude oil is an unambiguous good thing for the American and world economies. Unambiguous.
As I understand the lower-oil-prices-are-bad argument, the shift from roughly $100 to $80 a barrel will somehow close down the American energy revolution and destroy all the new jobs and related infrastructure services that have fueled our recovery.
Nonsense. I spoke with a CEO who is literally at the cutting edge of the horizontal-drilling and hydraulic-fracturing revolution about the so-called “profit break-even point,” or the marginal cost of producing the next barrel of oil. He told me it averages between $50 and $60 a barrel. And a new report from Citigroup energy analyst Edwin Morse argues that oil has to fall to $50 or less to fully halt shale-production growth.
But $80 is not $50. The economy won’t be destroyed. Plus, even $80 per barrel does great economic harm to our enemies Russia and Iran. A good thing.
Of course the fracking revolution has created new jobs. But not nearly as many as some think. Delving into data from the Bureau of Labor Statistics (BLS), during the jobs recovery of the last four years, employment growth in “oil and gas extraction” and “support activities for oil and gas operations” has increased by something around 200,000. That’s a good number, but it’s only a small fraction of the roughly 9 million new jobs created since the middle of 2010.
There are energy-related spillover jobs, though they’re tough to calculate. A recent Marcellus shale study suggests the creation of over 45,000 construction jobs. And in places like North Dakota, Texas, and Pennsylvania, the fracking revolution has created high-pay jobs — say $80,000 for the roustabouts who previously were unemployed. A BLS study shows North Dakota waitresses averaging $37,000 a year.
That’s good news. But my point is, if production slowed in the event prices fall below $50, the American economy won’t collapse.
More important: Virtually all consumers and producers will benefit from lower energy costs. Households could save as much as $100 billion because of today’s lower fuel costs. Business fuel savings will also be substantial. The result is a much more competitive U.S. (despite our high tax rates).
Retail gasoline at the pump is down around $3.15 a gallon from nearly $4 a little while back. Don’t you agree that’s a good thing?
All these factors will increase U.S. economic growth, not reduce it. Basically, the fracking revolution has delivered a powerful and positive supply shock to the economy. It means that more output increases real growth and reduces inflation for any given increase in nominal GDP — the exact opposite of what we saw in the 1970s.
As a percentage of energy consumption, U.S. energy production has increased from 69 percent in 2005 to 85 percent currently. We’re almost self-sufficient right now. So a related knock-on effect is the significant reduction in energy imports, which is lowering our trade gap, strengthening King Dollar, and increasing our economic growth.
Let me help all those analysts who have lost their minds in this stock correction. We’re witnessing a big outward move of the energy supply curve. By nearly doubling our oil output in recent years, it’s surprising the oil-price break hasn’t come sooner. It has very little to do with falling demand. In fact, the International Energy Agency predicts world energy consumption may only drop two-tenths of 1 percent — hardly measurable.
Finally, a political message: Falling energy prices are so good for the economy that a new Republican Congress, in its first 90 days, should put a bill on President Obama’s desk authorizing the Keystone Pipeline, opening federal lands to energy development, and ending oil export restrictions. Totally pro-growth.
Let the GOP dare the president to veto it.
23 Comments on "Lower Oil Prices Are Unambiguously Good"
forbin on Mon, 20th Oct 2014 8:56 am
oh dear
forbin on Mon, 20th Oct 2014 8:58 am
oopps rtn key error – bit like this article
lower oil prices are good for the people , the economy should boom . and then we will see the downside
demand up – supply choked by lack of capex ( due to only expensive oil being available )
boom then bang
whats not to love ?
Forbin
Davy on Mon, 20th Oct 2014 9:03 am
I hate to splash cold water on the DC/NY mafia propaganda but reality is pointing to macro financial diminishing returns. We are seeing many indications of growth running out of steam. This lack of growth is unmasking the imbalances in the system (bubble). If markets highs cannot be maintained the wealth effect cannot be maintained. All that malinvestment in the system is going to surface and with it the reaction of historic fundamentals that have been repressed. Rates cannot go up and the Fed is at limits to QE mechanics of bond purchases. Oil is stuck within this purgatory of the real economy and the repressed financial economy. The TPTB may yet influence the markets back up but if this is the latest BTFD it is showing its age. The Fed can only support the market so long without diminishing returns to that effort. At some point the fed effort is not going to be enough to maintain the wealth effect and markets will fall again. The original intent was for the markets to take over this effort with a breakout from QE. A market drop unmasks all those imbalances in the system causing rates to rise. Tapering is tightening. Tightening will surely dampen demand. Oil’s normal supply/demand fundamentals are skewed by these macro imbalances. Normally an oil drop would be a tax beak for the economy. Now it is deflationary just what the fed is fighting against. This is the nature of consequences and unintended consequences. It is another reason why diminishing returns is exposing imbalances and dysfunctions of the entire global central bank efforts. Repression is being repressed by diminishing returns and with it the wealth effect. Oil will become a pawn in these fundamental imbalances. Don’t expect this to be a normal up and down for oil.
GregT on Mon, 20th Oct 2014 9:03 am
“We must respect the wisdom of the market.”
All hail the wisdom of the market God. All watchful, all knowing, all omnipotent.
GROWTH,GROWTH,GROWTH!
“even $80 per barrel does great economic harm to our enemies Russia and Iran. A good thing.”
Crush thine evil enemies. All 225 million of them. They must be punished for their pure evilness.
GROWTH, GROWTH, GROWTH!
Somebody needs to put the Kudlows of this world out to pasture, his kind are a serious threat to the human race.
Bob Inget on Mon, 20th Oct 2014 9:07 am
Musical chairs. Of course this Xmas season will be the best since 2009. “Happy days are here again” .. SUV, tractor and truck sales are booming.
shortonoil on Mon, 20th Oct 2014 9:09 am
“Nonsense. I spoke with a CEO who is literally at the cutting edge of the horizontal-drilling and hydraulic-fracturing revolution about the so-called “profit break-even point,” or the marginal cost of producing the next barrel of oil. He told me it averages between $50 and $60 a barrel.”
Of course, let’s consult someone that has no interest in keeping the fairy tale alive as long as possible. Our analysis of 4598 wells in the Bakken put drilling costs at $53/barrel. It might average between $50 and $60 if you don’t take into consideration operating costs, taxes, royalties, and etc. Just stuff all that other stuff under the balance sheet somewhere.
The price of oil can not long exceed the value of the energy it delivers. That is a calculable amount. We have reached the point, or are very close to the maximum price for oil that the economy can support. With production costs increasing an average of $11/barrel in 2014, and continuing that trend into the foreseeable future the high cost production oils will soon be seeing their demise. Of course the cutting edge CEOs are not going to admit that. Just keep believing that the experts are telling you the truth; it takes time to unload all those stocks, and bonds!
http://www.thehillsgroup.org/
ghung on Mon, 20th Oct 2014 9:10 am
Higher oil prices help move our economy away from oil; something we’ll do eventually anyway, voluntarily or not.. Dropping oil prices are like your neighborhood street dealer giving folks a cut rate on meth.
This article’s conclusions are short-sighted and simplistic. Of course, they were meant to be.
ghung on Mon, 20th Oct 2014 9:13 am
Short – Comments are open at the original article. Maybe you can paste your comment there as well.
green_achers on Mon, 20th Oct 2014 9:33 am
If by “unambiguously good” you mean more pollution, higher temperatures, worse traffic, bigger vehicles on the road, more sprawl, longer time till we develop alternatives, fewer species, and fatter humans, I guess you have a point.
Northwest Resident on Mon, 20th Oct 2014 9:48 am
“…it takes time to unload all those stocks, and bonds!”
“Put another way, those individuals responsible for running the largest companies in the US, who know more about their companies’ growth prospects and the economy have used the Fed’s policies to cash out.
How telling is it that they’d rather have cash than stock? They would rather have this money sitting in a bank account earning next to nothing, or in a bond earning only slightly above nothing, than in stocks.
Of course, some of the money went towards buying luxury art work and luxury real estate which helps explain the strength in those markets… but you get my point… the captains of industry don’t want to be in their own stocks.”
ht tp://www.zerohedge.com/news/2014-10-18/folks-who-know-most-about-their-firms%E2%80%A6-and-economy%E2%80%A6-are-selling-farm
Plantagenet on Mon, 20th Oct 2014 10:16 am
Lower oil prices are like a tax cut. When people spend less on gas and heating, they have more to save, or to spend on other things (like preps). Peak Oilers should use this opportunity to stock up on the tools and other items they want and need.
henriksson on Mon, 20th Oct 2014 10:20 am
Unambiguously good: http://jto.s3.amazonaws.com/wp-content/uploads/2013/02/nn20130209f1a.jpg
Jerry McManus on Mon, 20th Oct 2014 10:37 am
He forgot the unambiguous good of lower oil prices wiping billions of barrels of so-called “unconventional” oil reserves off the books.
Then again, the cheerleaders never have been very concerned with the difference between potential resources and proven reserves.
Either way, as Rockman is fond of pointing out, if the money aint’ there then it aint’ gonna get drilled.
Perk Earl on Mon, 20th Oct 2014 11:08 am
“Rates cannot go up and the Fed is at limits to QE mechanics of bond purchases. Oil is stuck within this purgatory of the real economy and the repressed financial economy.”
Ya to that, Davy. Rates cannot go up because then a whole slew of foreclosures will ensue, true enough, but from what I’ve read the banks at some point will need to make more interest, so rates will have to rise. I don’t know if that is true, but once that begins it will be another force squeezing the predicament tighter.
rockman on Mon, 20th Oct 2014 11:20 am
ghung – “Higher oil prices help move our economy away from oil.” True. And as we saw in the mid 80’s a global recession does a fine job also. LOL. That bump in the road led to a 16% decline in global oil consumption. But not for long as the price of oil falling 65% or so from the peak in the late 70’s helped the global economy recovery.
This time? If the global economy doesn’t retreat too far we might be seeing the bottom of pricing. But a bit of a difference now that we have China and, to a lesser extent, India handling the high prices better than many other countries. Difficult as always to predict especially since we’re still in the accelerated portion of the dynamic.
Northwest Resident on Mon, 20th Oct 2014 11:33 am
Screwed if interest rates go up and screwed if interest rates stay where they are. Between a rock and a hard spot. Damned if they do and damned if they don’t. Whatcha’ gonna do? Pick the lesser of the two evils, that’s what. And in this case, the “lesser” of the two evils is to twist the screws tighter on the little people so the banks and financial mafia can live one day longer. When BAU comes crashing down, it’s a pretty safe bet that last man standing will be some dude in a tuxedo and tall hop hat who looks mysteriously like that game token in Monopoly.
Norm on Mon, 20th Oct 2014 11:58 am
The whole article reeks of far-right religion. Notice the automatic swipe against Russia, ‘our enemy’ just a bit over simplified? And that ‘wisdom of the msrket’. Sort of like ‘wisdom of John Boehner’ or the ‘wisdom of a carpenter’s nail’. just saying the market is not intelligent, and often is on the wrong side of reality.
zaphod42 on Mon, 20th Oct 2014 1:16 pm
Things to keep in mind:
1) The stock market is not a valid economic measure.
2) Most articles of this sort are spin to keep the market together, or create an increase in market inflation.
3) Most items concerning the economy, referring to its goodness, are written from an extremely biased viewpoint – one of capital worship. It is a religion, commonly called capitalism, and its values have zero to do with humanity and everything to do with money. Know your God and worship it.
4) This is not new. It is just much worse than it has been. The extreme worsening began with St. Ronnie the Wrong, and has continued, unabated and enhanced, by his apostles, Slick Willie, Shrub and Ol’ Bama.
5) Whether it is good or bad for the economy is senseless to debate. Oil price is, and it is a part of an overall condition. Whether good or bad depends on your present location in the hierarchy of economic class and power, and remains to be seen.
6) Zerohedge reminds us every day that, on a long enough time scale, the chances of survival for all is zero. A good thing to keep in mind.
Craig
JuanP on Mon, 20th Oct 2014 2:37 pm
“Lower Oil Prices Are Unambiguously Good”
What certainty, what ignorance.
Bob Owens on Mon, 20th Oct 2014 2:47 pm
It’s a sad day when we look upon $3 gas as “cheap”.
Perk Earl on Mon, 20th Oct 2014 4:19 pm
Look, I don’t want anybody thinking lower oil prices are bad (even though it’s root cause is lower net energy from dropping EROEI, QE tapering to zero resulting in part with oil price deflation, rising capex in relation to declining oil price – reducing exploration, wages stagnant against higher prices for food not included in inflation). Now come on, this is a good thing because it will increase economic activity (which will reduce oil supply, raising oil price, but not as high as it was before the recent big price drop so we end up in a downward spiral towards ever lower oil price affordability).
So be good citizens and buck up. Accept the illusion we keep crafting via MSM to keep you worker bees buzzing ever faster like the red queen.
JuanP on Mon, 20th Oct 2014 6:58 pm
I just read the title. I am extra busy, got no time to waste today.
antiwarforever on Wed, 22nd Oct 2014 2:36 am
“we must respect the wiseness of the markets…”(!!!!)…at that point I stopped reading this crap.