Those plummeting gasoline prices we’ve all been enjoying are expected to continue their downward spiral — a boon to long-suffering consumers. Analysts project the national average price per gallon will soon slide under the $3 mark not seen in four years — and then drop even further.
If a price drop of $1 per gallon of gas is sustained over the course of the next year, more than $320 billion from direct and indirect costs will be returned to the economy by consumers. That amounts to a non-governmental stimulus of almost 2 percent of gross domestic product (GDP). It’s equivalent to nearly our entire expected GDP growth this year of 2.6 percent — and more than last year’s GDP growth of only 1.9 percent.
American crude oil production has exploded in the past six years, aided by technological advances in hydraulic fracturing — “fracking” — and horizontal drilling that help producers extract oil deposits from shale once thought unreachable or too expensive to access. Oil production in states like Oklahoma, Texas and North Dakota has doubled. There are analysts who, after including estimates of resources not officially classed as “discovered” yet, conclude we have accessible supplies of oil and gas stretching into the hundreds of years.
The vitality of this domestic oil and gas revolution has been one of the biggest sources of strength in the American economy since the economic downturn began. The development of “tight” petroleum, as shale oil and gas are called, has also created and supported well over 2 million jobs. It could add another 1.3 million by 2020. And the supply chains that support this activity run across all the states.
We’re now pumping about 8.5 million barrels per day of crude and are expected to overtake Saudi Arabia as the top global producer in a couple of years. So, among the other benefits of falling oil prices is an increasingly energy independent America free of its reliance on oil imported from the volatile Middle East.
Supply and demand, plus politics
As the supply of oil grows, demand is dropping across Europe, Japan, India, China, Brazil and much of the emerging world market. In fact, economic growth is weak or non-existent across much of the world. A lack of growth means reduced demand and consumers and companies cutting their purchases of energy, helping bring prices down to the $80 a barrel range.
Saudi Arabia has so far refused calls from other OPEC members to reduce oil production — the traditional cartel response to falling prices — apparently preferring a long-term price war by pumping more rather than less. The Saudi thinking is portrayed by some analysts as a game of “chicken.” Saudi oil is cheaper to produce than American shale oil. So, the Saudis figure the lower prices go, the sooner Americans will have to abandon their production as too costly.
But other OPEC members are in more pressing danger because their economies rely so heavily on oil. Most oil cartel members depend on the proceeds of oil sales for their revenues and to subsidize their public services (or subdue their populations). Venezuela requires oil prices to be above $121 per barrel. Iran needs oil to be trading at more than $120 per barrel. Countries like Qatar and Kuwait can make do with prices in the $60s.
Falling oil prices are especially problematic for producers like Iran and Russia that rely on their petroleum exports to finance big ambitions. Budgets in both countries are premised on $100 a barrel prices, and the falloff will hurt. Some believe Iran’s nuclear program is at stake. And Russia is thought to be reconsidering an overhaul of its armed forces. Moscow’s calculations in Ukraine may also be changing. It’s easy to see why there’s a conspiracy theory suggesting the U.S. and Saudi Arabia are in collusion on keeping oil production high — using falling prices as a political weapon against Iran and Russia.
Here at home, conservation and the green movement have also contributed to the turnaround in our energy fortunes. We can all add our individual contributions to the good news about energy by maintaining our awareness of wise energy use and continuing to practice energy conservation.
Gas prices have fallen enough for a lot of consumers to pass on the small cars and hybrids popular in the 2009-2013 period and to consider going back to trucks and SUVs with weaker fuel economy. Fortunately, during the same period of time, stronger federal fuel economy standards have raised the overall fuel efficiency of all vehicles.
In fact, to push sales of alternative-fuel cars, automakers have been trying hard to cut prices. So, lower gas prices are helping drivers not only in terms of less expense at the pump, but also in terms of lower prices on hybrids and electric cars that promote gas savings as their reason for being.
Building on success
Lower gas prices are a sign of success. They also suggest it may be time to reconsider what could be outdated policies on oil exports, cross country pipelines and drilling on public lands.
The non-partisan GAO has concluded that removing America’s ban on crude oil exports would tend to lower gasoline prices. Our drillers would produce more oil if they could sell it on foreign markets at higher prices. Their growing production could also be sold cheaper here when processed by the world’s most advanced refineries, if they’re not tied up with foreign imports.
Even with strong evidence that fracking can be done safely, oil companies have been slow to disclose their practices and submit to public oversight. The industry and regulators can better cooperate to determine where the practice is safe for production and where transport via pipeline is practical.
Despite the evidence of fracking safety, production of shale oil was down 6 percent and of natural gas down 28 percent on federal lands between 2009 and 2013. If fracking is safe — we need more of it.
The benefits of falling oil prices are obvious. First, in savings for the American consumer paying less for gas. Second, in earnings for the American worker whose production is powering our economy. Third, in relief for the American taxpayer who’ll enjoy less military involvement in the Middle East and fewer confrontations with powers such as Iran and Russia.
The not-so-obvious benefits are more subtle but still compelling — a general reduction of tension for America and for people throughout the world as a result of our new and hard-won energy independence.