The U.S. Becomes an Oil Economy
The U.S. has gone from a big-time net importer of oil to a small-time one. The latest base-case forecast from the EIA is that it will be a “modest net exporter” from 2029 through 2045. Neither the EIA nor anyone else (that I know of, at least) foresaw a huge increase in U.S. oil production over the past decade, though, so let’s leave the forecasts aside. What has already happened is momentous enough. Here, for example, is the long view (going back to 1870) on U.S. crude oil exports:
Oil’s role in the U.S. economy has changed so much and so fast thanks to hydraulic fracturing and other new methods of getting oil out of shale that it’s worth pausing from time to time to consider what this entails. I’ve written before about the oil and gas boom’s role in keeping the trade deficit from exploding, and in making it harder for this country “to take the leading role in shaping the post-fossil-fuel energy landscape.” Now let us consider the domestic oil boom’s impact on the business cycle.
The standard story about oil and the U.S. economy, as University of California at San Diego economist James D. Hamilton laid out in a 1983 paper, a 1996 follow-up and a paywall-free 2005 summing-up, is that sharp oil-price increases have a habit of causing recessions. “The key mechanism whereby oil shocks affect the economy,” Hamilton wrote in 2005, “is through a disruption in spending by consumers and firms on other goods.”
Because the U.S. produced far less oil than it used, past oil-price increases not only took money out of Americans’ pockets, but also shipped much of it overseas. Booming U.S. oil production and a shrinking trade deficit in oil ought to change that equation, at least a little.
There hasn’t been a major price spike since the U.S. oil boom began (in part because the U.S. oil boom has precluded it), but there was a major collapse in the latter half of 2014, with the price of crude falling 59 percent in dollar terms in just six months. “This decline produced a stimulus of about 0.7 percentage points of real GDP growth by raising private real consumption,” economists Christiane Baumeister of the University of Notre Dame and Lutz Kilian of the University of Michigan concluded in 2016. “This stimulating effect, however, has been largely offset by a reduction in real investment by the oil sector.”
Since early 2016, oil prices have recovered somewhat, but not rapidly enough to put a big crimp in consumer or business spending. Real investment in the U.S. oil and gas sector, meanwhile, bottomed out in the fourth quarter of 2016 and, while it’s still not back to the levels of 2012 through 2014, appears to have been a major driver in the pickup in economic growth last year and so far this year. CNBC’s Steve Liesman talked to several economists in May who had concluded that rising oil prices were now a “wash” for the U.S. economy; I wouldn’t be surprised if, as long as the increase is gradual enough, they’re actually a net positive. After all, the energy intensity of the U.S. economy — the amount of energy consumed per dollar of real gross domestic product — has been declining steadily since the early 1970s. On aggregate, at least, we can afford somewhat higher energy prices.
That’s not to say that a sharp spike in oil prices would be great news for the U.S. economy. The disruption for households and non-oil businesses might well outweigh the profits of and increased investment by the energy industry. The share of economic activity accounted for by oil and gas extraction and refining is higher than it was in the 1990s and early 2000s, but that still leaves more than 95 percent of the economy in the hands of oil consumers.
The best economic situation all around, in fact, would seem to be prices that are high enough to allow oil drillers to turn a profit but still stable. For the past half century, interestingly enough, the Organization of the Petroleum Exporting Countries has been trying (and often failing) to keep oil prices profitably high and stable through production quotas and other means. While it has often been assailed by U.S. politicians — including President Donald Trump — for this uncompetitive, anti-free-market behavior, OPEC actually got the idea from the U.S., where the Texas Railroad Commission regulated and restricted oil production from the 1930s through the 1960s. Before that, in the late 1800s, John D. Rockefeller had tempered the nascent oil industry’s boom-bust tendencies by seizing control of most of it. Now that the U.S. is a major oil power again, don’t be too shocked to see similar attitudes and efforts resurface here.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Justin Fox is a Bloomberg Opinion columnist covering business. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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