Exploring Hydrocarbon Depletion
Page added on December 1, 2016
When gasoline prices spike over the next few days, find some comfort in knowing that the extra money will benefit struggling Texas companies and the U.S. economy.
Admittedly, the idea that higher oil prices could benefit the U.S. is radical. Historically, higher oil prices have dragged down the economy by taking more money from American pockets and sending it overseas. But now that the United States is one of the world’s largest energy producers, higher prices mean more revenue for U.S. oil companies that will ultimately spend it rehiring American workers to drill largely Texas wells.
This puts the nation in the same league as Saudi Arabia. But while the incoming Trump administration talks about ramping up oil production, Saudi Arabia is planning for demand for oil peaks, and we should as well.
For evidence that an extra 5 cents to 15 cents a gallon will not hurt the U.S. economy, consider how little the $1 drop in prices helped in 2014. At the time, many economists expected an economic boost because the average American family had an additional $200 a year to spend on things other than fuel.
The extra spending, though, was offset by more than 140 companies going bankrupt, more than 120,000 oil workers losing their jobs and more than $120 billion in capital disappearing from oil company balance sheets. Cheaper foreign oil also encouraged refiners to import more oil, actually increasing our trade deficit and lowering our gross domestic product.
Higher energy prices, therefore, could reverse some of the capital destruction. I explained on Wednesday how it will take time for the market to work off inventories, pay off debts and spark new investment, but sustained prices above $55 a barrel could boost oil company spending in late 2017 and 2018. That means rehiring unemployed workers.
Additional U.S. oil production also means fewer imports and a lower trade deficit, which boosts GDP. Limited demand growth and fierce competition will luckily cap gasoline prices at historically low levels, minimizing the pain to consumers.
OPEC, which drove up prices by announcing production cuts on Wednesday, also has no interest in Americans paying $3 a gallon for gasoline. That would hurt U.S. economic growth and reduce demand, as well as encourage more competitors to pump oil and diminish the cartel’s market share.
Saudi Arabia, the world’s largest and lowest-cost oil producer, is particularly interested in maximizing profit without choking off demand, said Antoine Halff, director of global oil markets at Columbia University’s Center on Global Energy Policy. The Saudis issued $17.5 billion in sovereign bonds in October and have promised to sell shares in the national oil company, Aramco, within two years. The value of both the stock and bonds is based on oil prices.
“The kingdom’s goal of reducing its dependence on oil prices, ironically, requires them to prop up the oil price initially,” Halff said. “Now that they’ve gone to international debt markets, now that they’ve gone very aggressively into the equity markets with the partial privatization of Aramco, the strategy of accepting low prices doesn’t work anymore.”
Deputy Crown Prince Mohammad bin Salman, who is in charge of transforming Saudi’s economy, plans to use the cash raised to attract new industries to the kingdom while investing in petrochemical facilities, natural-gas-only wells and massive solar-energy projects. He is concerned about the demand for oil peaking and the kingdom being left with a sea of oil that no one wants.
“The massive national transformation program for 2030, the massive decarbonizing of Aramco and the effort to go to public debt markets to finance the budget, all of this changes the incentives for the Saudis,” Halff said.
The Saudis are not the only oil producers worried about future demand for oil. Most major European oil companies are planning for peak oil demand as the world shifts to electricity to power transportation. Simon Henry, chief financial officer for Royal Dutch Shell, shocked analysts last month when he suggested demand for oil might peak sooner than most expect.
“We’ve long been of the opinion that demand will peak before supply,” Henry said on a conference call discussing the company’s shift to natural gas production. “And that peak may be somewhere between 5 and 15 years hence, and it will be driven by efficiency and substitution, more than offsetting the new demand for transport.”
This doesn’t mean the world will use less energy, it will simply tap different sources. Texas is already a leader, moving away from coal to generate electricity from natural gas and from the nation’s largest wind-turbine capacity.
The United States would do well to follow Texas’ and Saudi Arabia’s example and use oil revenues to develop the energy resources of the future. Being a net energy exporter would be a fantastic achievement, but let’s do it in a way that will last for generations, not simply capitalize on short-term trends in oil prices.