Reaping The Benefits Of America’s Energy Development

On Monday, Investor’s Business Daily posted a commentary on the current global oil market. The commentary noted that Russia has been working with OPEC (Organization of the Petroleum Exporting Countries) to cut oil production in an effort to keep oil prices artificially high (after all– it worked in the 1970’s).

The commentary reports:

Despite an uptick in oil prices, a closer look at the oil market unveils the real winner of curtailing crude exports: America. U.S. oil output broke through the 10 million barrels a day mark for the first time in half a century. And, according to a recent statement by the Director of the International Energy Agency, it could reach a record of 12.1 million barrels a day in 2023.

Although the price of a barrel of oil has somewhat retreated from the January $70 heights, it is still $10 above its level a year ago and more than double what it was during the price collapse in early 2016. This has been helped along by phenomenal discipline within OPEC+, as the agreement on production cuts between OPEC, Russia and nine more exporting countries is informally known. Apparently compliance has reached a surprising 138% — exporters have made bigger cuts than initially pledged.

The details of this show that one reason for the drop in production is the collapse of Venezuela‘s oil industry. Last year oil production in Venezuela shrunk by 20 percent– roughly 500,000 barrels a day. When the government nationalized the oil rigs in Venezuela, they had no idea how to maintain the rigs and maintain production, so production has continued to drop since that takeover. What has happened (and is happening) in Venezuela is a living example of the fact that socialism does not work.

The commentary concludes:

Arguably, leaders of the Gulf states and Russia are falling victim to politics, a field in which it’s better to be seen doing something than nothing. Especially when no one is sure what (if anything) would work. But who is the biggest economic winner in this game? Ironically, it’s America yet again.

Each time Saudi Arabia and their allies restrict exports, they prop up the price and create a vacant market share which then gives a boost to those producers outside the agreement that are not bound by quotas. The biggest among them is the United States. Naturally, thousands of American companies are keen for a free ride.

All of that is happening already. The U.S. has just overtaken Saudi Arabia in oil production and is expected to rival Russia soon. No wonder U.S. oil companies were expected to be especially cordial with the Saudi delegation during the princely visit. But one might imagine that on the sidelines of the meetings many Saudis will be scratching their heads and wondering how and why did they get themselves into this pickle.

America needs to be energy independent. It allows us to be in control of the fossil fuel that is the backbone of the current world economy. The 1970’s proved that was important.

What American Energy Independence Means

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.

Losing Your Monopoly…Slowly…

Investor’s Business Daily posted an article today about the recent influences on oil prices.

The article reports:

As the mad dash back to the U.S. oil patch has even global oil giants like Chevron (CVX) and Exxon Mobil (XOM) turning their focus to shale, U.S. oil production is on pace to exceed peak production levels in July and could hit 10 million barrels per day in August.

Those milestones loom as OPEC and top non-OPEC producers weigh whether to extend by another six months their agreement to reduce output by 1.8 million barrels a day. The cartel’s next meeting is scheduled for May 25.

The initial pact reached late last year lifted oil prices and encouraged U.S. producers to pump more oil. The extra supply has since weighed on prices, which have fallen more than 10% since the start of the year. But hedges allowed U.S. firms to lock in the higher, earlier prices, and they have continued ramping up output.

U.S. crude futures sank 4.8% to settle at $45.52 a barrel on Thursday, plunging to a five-month low and dropping below the price seen before OPEC reached its production pact in late November.

The result of developing American energy independence by developing America‘s fossil fuel resources is lower fuel costs for Americans, better national security for Americans, and a better negotiating position with the ‘oil bullies’ of the world.

The chart below illustrates what is happening to the worldwide oil market:

There may come a day in the future when green energy is the dominant energy source, but right now the world economy is essentially based on fossil fuel. Until someone comes along and invents a green energy source that can provide energy 24 hours a day and be cost effective, the world will revolve on fossil fuel. Because our economy is based on fossil fuel, it is good to have some leverage against those who are able to deny their citizens basic human rights without being challenged because they have a monopoly on fossil fuel.

 

 

 

This Is Not Really Bad News

Bloomberg is reporting today that OPEC (organization of the Petroleum Exporting Countries) has agreed to cut oil production beginning in January. The market has already reacted, and crude prices have climbed to $50. That means that the price of a gallon of gasoline will be going up, heating oil will be going up, and the cost of electricity may also be affected. However, there is a bright side to this.

One of the things to expect in a Trump Administration is the development of America‘s gas and oil resources. The Obama Administration has blocked that development wherever possible. Theoretically, the price increase along with the end of some regulations could create energy independence for America. This would have a drastic impact on our foreign policy. There is, however, more to the picture. In the past when OPEC has seen America moving toward energy independence, they have dropped the price of oil so that development of America’s oil reserves did not make financial sense. It will be interesting to see if they do that again.

We also need to remember what the impact of American energy independence will do to the world market of oil. If America can reach a point where it exports oil, OPEC will no longer be important. It will be interesting to see at what point practicality on the part of OPEC overcomes immediate greed. Their immediate greed will encourage the growth of the American energy market. Practicality would keep prices low so that America had no incentive to develop its resources.