Yesterday Investor’s Business Daily posted an editorial about the current price of oil. Any person familiar with basic economic theory understands the law of supply and demand. When there is a lot of something, the price goes down. When something is scarce, the price goes up. Some of our recent political leaders missed this point, but we are now seeing the principle of supply and demand at work in the oil industry.
The editorial reports:
Energy: Last week Royal Dutch Shell (RDSA) told investors that it expects oil prices to be “lower forever.” We’re still waiting for all those people who were only recently complaining about higher-forever oil prices to admit their mistake.
It wasn’t that long ago that President Obama was mocking Republicans for their “three-point plan for $2 gas: Step one is drill, step two is drill, and step three is keeping drilling.”
He went on to say that “the American people aren’t stupid. They know that’s not a plan.”
Renewable energy, he said, was the only way to solve the “problem” of high oil prices.
Of course renewable energy came with numerous government subsidies and taxes on ‘old energy.’
The editorial explains the results of ‘drill, baby, drill’:
Domestic oil production was skyrocketing even as Obama made those remarks — thanks to advanced drilling technologies that have opened up vast new domestic supplies to production.
The Energy Information Administration projects that, next year, U.S. oil production will average almost 10 billion barrels a day, which would beat the previous record of 9.6 billion in 1970. What’s more, a quarter of this production is coming from one oil field: the Permian Basin in West Texas.
Those “obscene” industry profits? They’ve fallen as well. ExxonMobil’s (XOM) revenue in 2016 was about half what it was in 2011. In its most recent quarter, the company earned $3.4 billion — or 78 cents share. In the same quarter in 2011 it earned $10.7 billion, or $2.18 a share.
Oil companies for a time even had to borrow money to pay dividends.
Low oil prices have also led to a sharp drop in the taxes paid by the industry to the federal government. In 2016, the federal government collected about $6 billion in royalties, rental costs, and other fees from oil production on federal lands. That’s down from $14 billion in 2013.
Now Shell is saying that it’s bracing for low oil prices forever.
Lower energy prices have a positive impact on the American economy–consumers have extra money to spend, it is cheaper to manufacture goods here, and tourist-related industries thrive when Americans can travel and not worry about the cost of fuel.
The article concludes:
Even if the current oil glut causes some pain to the oil industry and crimps tax revenues, it is good news for the economy, since lower energy prices reduce the cost of doing business across the board, and make the U.S. a more-attractive place to do business on a global scale.
But it does raise some important questions: Where are those people who were screaming about Big Oil? Why aren’t they being asked to explain how they could have been so wrong? And just who, exactly, was being stupid?
Economic principles work–every time they are allowed to.