Make No Mistake, The Oil Slump Is Going To Hurt The United States Too

Oil Rig - Public Domain

The view that cheaper oil automatically boosts US GDP is overly simplistic. It assumes that US consumers will spend the money they save at the pump on US-made goods rather than imports. And it assumes consumers won’t save some of this windfall rather than spending it.

Those are shaky enough. But the story that cheap fuel for our cars is good for us is also based on an even more dangerous assumption: that the price of oil won’t fall far enough to wipe out the US shale sector, or at least seriously impact the volume of US oil production.

The nightmare for the US oil industry is that the only way that the market mechanism can eliminate the global oil glut—without a formal agreement between OPEC, Russia, and other producers to cut production—is if the price of oil falls below the “cash cost” of production, i.e., it reaches the price at which oil companies lose money on every single barrel they produce.

If oil doesn’t sink below the cash cost of production, then we’ll have more of what we’re seeing now. US shale producers, like oil companies the world over, are only going to continue to add to the global oil glut—now running at 2-4 million barrels per day—by keeping their existing wells going full tilt.

True, oil would have to fall even further if it’s going to rebalance the oil market by bankrupting the world’s most marginal producers. But that’s what’s bound to happen if the oversupply continues. And because North American shale producers have relatively high cash costs (in the $30 range), the Saudis could very well succeed in making a big portion of US and Canadian oil production disappear, if they are determined to.

(Read the rest of the story here…)

1 thought on “Make No Mistake, The Oil Slump Is Going To Hurt The United States Too”

  1. I disagree. There are different levels of what is happening here. The basic level is discretionary income of the average person. This drop in oil prices is going to be a tremendous flywheel for the basic economy of retail business.
    Instead of reserving $30-$40 for transportation costs the average person is dropping that almost in half.
    That additional cash flow will show up in the retail market no matter who originates the goods.
    This is at best a very short term solution.
    It fixes nothing. It does postpone.
    The only way to fix it is to put discretionary income back in the middle class spending public of America.
    What ever that takes.
    I suggest reversing a whole lot of decisions made by the law community of the U.S. Congress.
    Anything that cuts into the discretionary income of the American Public has to go!
    That means fixing the health care insurance system that is now cutting into almost half of the discretionary income of the American public.
    That means fixing the problems caused by altering the way we pay taxes.
    It means putting the Real Estate tax breaks back in place so investors see it as a positive investment instead of a loser.
    It means putting the Marriage advantage back in the tax laws. So people have an advantage by being married.
    More important than any of this is putting us on an equal basis with foreign competition in our industrial base.
    I mention no country here. I simply say our laws hamstring our businesses doing business and that has to stop.
    Our only mistake in not electing Romney in the last election is that we need someone thoroughly ruthless in putting the United States economic system back together. He was that ruthless. He does understand salvage. He does understand failed businesses. And he knows how to tear down that system for profit. Did he know how to fix anything. Not sure about that.
    I think if we are dealing on an international marketplace we have to deal the same as people elsewhere do.
    That means allowing monopoly practices like combining research to gain new competitive products here rather than abroad.
    The danger of all that corporate business in foreign countries is the same one that destroyed the economic colony system of Great Britain in World War II. Countries all over the world nationalized British factories abroad after World War II!
    Short term that bankrupted Britain. Long term it bankrupted every colony that tried it. The key being technical skills and parts.
    There is many a building stolen from Britain no longer in business world wide.
    The key to beating foreign competition long term is the cost of transporting goods over long distances to compete with local products. If they are on an equal playing field it is not possible to compete. And that is the key to why our country is crumbling around us. As our currency devalues to meet their currency the cost of transportation becomes too high to do business abroad.
    Plus they give corporations a free tax run a lot of times. No wonder they subcontract the work to overseas places.
    So why are they given a free tax run abroad putting our companies at a disadvantage? I think the key is bribe money in the U.S. and I point no specific fingers here. But if the finger is pointed, it is likely to go high in government, very high.
    I leave that to better pay grades than my own.
    Until this country does a reality check and starts putting our people and our businesses first, then there is no fix to the problem.

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