America’s recent oil boom has begotten a dangerous and false euphoria. Many economists and pundits have concluded rising oil prices are hardly damaging to the U.S. economy.
In 2006, U.S oil production had bottomed at about 6.8 million barrels a day and the country labored under a $271 billion petroleum trade deficit. That taxed gross domestic product by at least 2.55 and employment by 3.5 million jobs during the Great Recession.
The shale boom made the problem easier, and America’s energy policy makers — not nearly all of whom are in Washington — and critics of conservation seem to believe America can burn all the gas it likes and America is headed for a new prosperity as a net oil exporter.
However, the problem has gotten easier but it has not gone away. This year, the overall petroleum deficit—crude oil and refined product imports less exports—will likely be about $100 billion and reduce aggregate demand by about 0.7% and employment by 1 million.
The Trump administration recognizes the foreign policy and economic benefits of freeing America from import dependence and deserves significant credit for rationalizing petroleum production regulation. Along with rising oil prices, this is pushing up crude yields in the Permian and Bakken fields but net oil imports are still about 3.3 million barrels a day.
Hence, when the price of oil rises, oil producers and workers’ incomes do rise but everyone else loses even more though higher priced gas, heating oil and feedstock for the petrochemical industry. And the overall drag on growth, employment and wages gets worse.
The attendant burden appears perilous to rise, because the shale boom has limits, OPEC is not dead as some critics were saying a few months ago and America’s auto producers seem to have forgotten that when gasoline gets more expensive, car buyers gravitate back to smaller vehicles.
In the early years of the shale boom, optimism encouraged bankers and investors to give drillers all the water, sand and pipe they wanted in a quest for market share but then oil and gas prices collapsed — the average pump price for gasolinefell to nearly $2 a gallon in 2016.
The Saudis with help from Vladimir Putin, state entropy in Venezuela and sanctions on Iran have driven up oil and pump prices again—and Saudi Crown Prince Mohammad has set a target of about $80 per barrel. He needs that much to balance the kingdom’s budget, but the Saudis and Russians remain concerned about how much and how quickly they can push oil prices.
U.S. production is responding but not nearly to the point that critics of conservation predict, because the money folks are now demanding that oil companies actually make a profit—an inconvenience for both conservative advocates of reckless burn and liberal advocates of mass transit and bicycling.
If OPEC is dead as its American detractors allege, the crown prince has got a corpse dancing the supernatural—that has pushed gas prices to nearly $3 a gallon.
Out in Detroit, Ford’s F, +0.26% new CEO Jim Hackett—who engineered the ouster of Mark Fields for the sin of record profits—behaves as if he can see the future—cheap oil.
Someone’s wrong—either the prince or Hackett—and having watched oil markets defy forecasters for decades, I won’t hazard a guess.
Hackett has decided Ford will phase out virtually all sedans in favor of more gas guzzling SUVs and pickups—Chrysler FCAU, -3.41% and GM GM, +1.48% are on track to pursue similar product strategies. They forget if the prince gets his way, gasoline could park well above $3 for an extended period—especially with President Donald Trump’s new sanctions on Iranian oil.
Then Toyota TM, +2.22% , Hyundai 005380, +2.14% and other foreign auto makers will have the sedan market virtually all to themselves. These days more moderate-sized SUVs and crossovers may be made on the same platforms as cars but despite what you may have read about flexible manufacturing, rolling out new sedans would take years once those are gone from Detroit’s lineup.
There must be something special about running Steelcase (the office furniture folks) and the University of Michigan athletic program that anointed Hackett with special clairvoyance. He’s betting the Ford ranch on moderate oil prices and even a casual examination of history and the facts indicates that’s darn foolish.
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