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Page added on May 12, 2018

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How Rising Oil Prices Will Affect the US

Consumption

Four of the past five recessions—1973, 1980, 1990, and 2008—were preceded by a sharp increase in the price of oil. Since last summer, the Brent benchmark oil price has soared by about 50%, to nearly $78 per barrel.

More increases could be coming. Additional sanctions on Iran imposed by the Trump administration will limit that country’s ability to supply world markets, while the deteriorating situation in Venezuela could mean further cuts in its production.

The Saudi energy ministry has said it will help “mitigate the impact” of potential shortages, but this may not amount to much. After all, Saudi officials are reportedly targeting an oil price as high as $100 per barrel to support the valuation of Saudi Aramco before its initial public offering.

If the Saudis get their way, average U.S. gasoline prices could rise above $4 per gallon, or about 40% higher than today. Unlike past episodes, the potential doubling of the price of oil since last summer won’t likely dent the U.S. economy’s momentum. Instead, the impact would be felt in who spends what.

Households will have less free cash to spend, but businesses will offset their restraint with additional capital spending. States at the heart of the shale boom, especially New Mexico and Texas, will grow faster than the rest of the country. The difference is the shale revolution.

How Rising Oil Prices Will Affect the U.S.

The obvious consequence of shale is reduced reliance on imports. Drilling into tight oil formations now accounts for about 5.5 million barrels per day of U.S. crude production, up from just 500,000 barrels a day in the summer of 2008. This has more than doubled total U.S. output. Over the same period, U.S. oil consumption has increased by only about 7%.

The net effect is that two-thirds of America’s total oil demand is now satisfied by domestic production, compared with just one-third in 2005-08. This is less important than it may seem, however, as the U.S. was even less dependent on imports at the time of the 1973 oil shock than it is today.

The U.S. responds differently to oil price moves now than in the past because of the specific properties of shale. Oil from most other sources—conventional wells, deep underwater, and tar sands—flows for decades after the initial investments are made. By contrast, most of the oil that will come out of a typical shale well is extracted in the first three years. Just maintaining output requires constant additional drilling. Rising prices quickly encourage additional investment, while low prices lead to sharp cuts in spending.

When oil prices were high, oil-related investment provided a fillip to the U.S. economy. From the start of 2010 through the middle of 2014, the spending boom on exploration, shafts, wells, and machinery directly added 0.15 percentage point to the U.S. economy’s average yearly growth rate.

The total impact was much bigger, however, since the boom also led to a hiring spree of “roughnecks” and the emergence of a support system to feed, house, and entertain them. Additional trucks, trains, and pipelines were also needed to get supplies to and product from the remote locations where the boom occurred. Taken together, the shale boom probably boosted the U.S. economy about 0.3 percentage point each year during that period.

How Rising Oil Prices Will Affect the U.S.

Oil prices then fell by more than 70% from the middle of 2014 until the trough in early 2016. Initially, many had hoped the drop in energy costs would jolt the U.S. economy into a faster growth pace as consumers used the extra cash to spend more on things they wanted. Consumption did accelerate, as did investment spending on computers and housing. The boost from those sectors added about 0.7 percentage point to the yearly growth rate of the U.S. economy.

Private domestic demand grew slightly slower during the bust than it did when energy costs were much higher, because the gains in the rest of the country were not quite enough to offset the pain in the oil patch. Cutbacks on drilling rigs, specialty equipment, and heavy trucks directly subtracted about 0.4 percentage point from the U.S. economy at a yearly rate.

The sharp recession that hit the shale states—New Mexico, North Dakota, Oklahoma, and Texas—slowed the U.S.’s yearly gross-domestic-product growth by nearly one percentage point from what it otherwise would have been. The unemployment rate in Houston rose by more than two percentage points relative to the country as a whole.

Oil prices have more than doubled since that trough. The number of vehicle miles driven, which first began rising at the end of 2014, has plateaued. Demand for crude oil from U.S. refineries has flatlined. Slowing growth in consumption spending, home building, and other nonoil investment has shaved about 0.7 percentage point off America’s yearly growth rate.

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So far, all of these negatives have been completely offset by the rebound in oil investment. The number of active rigs has soared over 160%. Heavy truck sales, which are strongly correlated to the state of the oil industry, are up by more than 20%. There is room for further growth if prices keep rising. Despite the rebound, there are only about half as many active rigs compared with the peak in October 2014.

The recovery has so far been concentrated in the Permian Basin, where wells can be profitable even with oil at $50 per barrel—which explains why New Mexico’s oil output has grown 40% since the end of 2014 while North Dakota’s output has shrunk. Higher prices should also boost U.S. oil exports.

These positive impulses would probably be offset by the impact on consumers. U.S. households were only able to sustain their spending in the face of weak income growth, rising interest payments, and higher energy costs by slashing the personal savings rate by three percentage points. Further oil price increases could force them to start cutting their non-energy-related spending.

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12 Comments on "How Rising Oil Prices Will Affect the US"

  1. Cloggie on Sat, 12th May 2018 4:51 pm 

    Shell Prelude, the largest vessel in world history, 6 times an aircraft carrier, is starting operations near Australia:

    http://www.bbc.com/news/business-44003521

    Drilling for and collecting natural gas.

    If this is a “prelude”…

  2. makati1 on Sat, 12th May 2018 7:18 pm 

    $4 gas? $7 gas? $10 gas? It will be the final stage of the American Dream when it really turns into an American Nightmare. Go for it America!

  3. bronzetti on Sat, 12th May 2018 8:08 pm 

    LOL you doomsayers! Do you not see a pattern? PO believers are crazy and you need to stop using tis to further your agenda. You know who you are…

  4. Anonymouse1 on Sun, 13th May 2018 12:40 am 

    Is that you marmitard? Yea, probably is. Loser…..

  5. Brent Georgeson on Sun, 13th May 2018 2:02 am 

    bronzetti PO believers are not crazy it is simple math. Oil is a finite resource that means it has to run out at some point.

  6. makati1 on Sun, 13th May 2018 2:38 am 

    I would think that price (EROI) and the shrinking of the world economy is going to end the Age of Petroleum before the oil actually runs out (EROEI). It will get so expensive that you and I cannot afford it and it will go to the governments and militaries and then, not even to them. Slow or fast? We shall see.

  7. Cloggie on Sun, 13th May 2018 3:27 am 

    Oil is a finite resource that means it has to run out at some point.

    Conventional oil is a finite reserve (gasifiable coal not so much), but there is enough left to build a few million wind towers (one 12 MW per a few thousand people) and solar panels and corresponding electrolysis (H2O –> H2) machines and/or pumped hydro storage facilities and put the energy predicament concerns to a rest.

    Not that the doomer sect wants to hear this.

  8. Davy on Sun, 13th May 2018 4:53 am 

    “$4 gas? $7 gas? $10 gas? It will be the final stage of the American Dream when it really turns into an American Nightmare.”
    $4 gas is not a problem. $7 gas will cause pain. $10 gas will never last. This is a global issue, 3rd world, not just American.

    “It will get so expensive that you and I cannot afford it and it will go to the governments and militaries and then, not even to them. Slow or fast? We shall see.”
    We have not seen it ever get that expensive so I doubt we will go high for long especially in these days of managed central bank activity. Central banks will make an effort for it not to happen. When it finally gets short in supply we will be in a new world order. Renewables will help for a time.

    “Conventional oil is a finite reserve (gasifiable coal not so much), but there is enough left to build a few million wind towers”
    North Sea coal in a resource not a reserve. It is not cost effective and not will it likely ever be.

  9. DerHundistlos on Sun, 13th May 2018 6:42 am 

    “Yeah, I deserve all the credit for lowest gas prices in 10 years.”

    ~~Dear Leader Donald Dump~~

  10. Bronzetti on Sun, 13th May 2018 7:19 am 

    Brent and all the other PO believers
    I get the concept. You need to remember that the stone, bronze and iron ages didn’t end because they ran out of those materials. They ended because they found better things each time. Same here. Doomsday people have always been around and probably always will. It’s not science either. There’s a lot of conjecture and Filtering of the facts through your world view.

  11. Cloggie on Sun, 13th May 2018 8:17 am 

    “North Sea coal in a resource not a reserve. It is not cost effective and not will it likely ever be.”

    You made a study out of it, eh?

    https://www.researchgate.net/publication/265687040_Cost_comparison_of_syngas_production_from_natural_gas_conversion_and_underground_coal_gasification

    “Underground coal gasification (UCG) is a promising technology to reduce the cost of producing syngas from coal… the cost of UCG syngas was within the cost range of syngas produced by natural gas conversion.”

  12. Cloggie on Sun, 13th May 2018 8:18 am 

    Damn, sorry for the long link without hyphens.

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