Increased US Oil Production Means Cheap Oil Ain’t So Good No More

This is one of those obvious little things – as the US increases oil production from those unconventional, fracked, fields then the impact of lower oil pries on the US economy becomes less and less favourable. It always does catch people by surprise though when the background to economic decisions changes like this.

Take exports for example. The only time, even possibly, when the aim of trade is to increase exports is if you’re trying to defend a fixed exchange rate. We’ve not been doing that for near five decades now. And yet we’ve an entire administration – at least the President and some advisers – dedicated to that idea that the purpose of trade is exports. They’re 50 years out of date.

So it is with the idea that cheap oil is beneficial to the US economy:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] 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: Oil-price drops boosted U.S. economic output. [/perfectpullquote]

Obviously enough, now that the US exports some crude and produces very much more of its own needs as well this is less true. Sure, households and consumers like cheap oil just as producers don’t. But that’s now largely swings and roundabouts inside the domestic economy. There’s little to no leakage now out to foreigners. Thus the effect upon the economy as a whole is different:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] Crude reality: Cheap oil used to be a slam-dunk positive for the American economy. Abrupt declines in oil prices would create huge savings for consumers and businesses alike. It was like a massive tax cut — and one that didn’t blow up the federal deficit.
But the shale oil boom has since changed that equation. The United States today is not only the largest guzzler of oil, it’s vaulted to the top of the production leaderboard as well. US output recently surpassed Saudi Arabia and Russia for the first time since 1973.
That means even though President Donald Trump is calling for oil prices to go lower, there are significant negative consequences of the deepening bear market in oil.
Lower oil prices threaten to wipe out jobs, set off cash crunches at overleveraged frackers and depress business spending. The 2014-2016 oil crash caused hundreds of thousands of job cuts and dozens of bankruptcies.
“The US now responds to lower oil prices like an OPEC member,” Pantheon Macroeconomics chief economist Ian Shepherdson wrote to clients last week. “When the president calls for lower oil prices, he’s ignoring the new reality.” [/perfectpullquote]

Well, we generally think that pleasing consumers is better than pleasing producers. But the rules of the game have certainly changed.

The larger point being that people do tend to gain their prejudices about economics when they study the subject. That will mean a course or two, maybe an entire degree, at college and that’s about it. So, they’ll believe what was true then about exports or oil prices – and it’ll be the very Devil’s own job to get them to change their minds later. Which is a pity as circumstances do change and therefore so do the answers to the same old questions.