The Crude Truth

Oil’s effect on US growth has been debated heavily, and this week’s Barons suggests that while the initial effect of boosting consumption will help the economy, the ripples of less shale production will eventually drag on economic growth.  This will effect the numerous energy beneficiaries including railroads and truck driving.  Nevertheless JP Morgan is more positive, estimating every 10% drop in oil contributes .25 to GDP over time.

Oil prices have so far declined 30% from their late June peak as US production increases,  jumping past 9 million barrels a day last week for the first time since 1986 (EIA).  This narrows the gap between the US and #2 producer Saudi Arabia (producing at 9.7 million barrels/day) while Russia remains the leader (10.1 million barrels/day).

Domestic production has jumped 60% over the last 5 years due to breakthroughs in hydraulic fracking and horizontal drilling.  The industry directly employs 213,500 people as of October, doubling over the past decade.  This incredible leap in US production has weighed heavily on net oil imports, averaging 5.2 million barrels of oil a day so far this year (through August) compared to 12.6 million over the same period in 2006 (a reduction the size of Iran & Kuwait’s daily production).

On a shorter term basis, petroleum imports are down 7.5% this year (compared to the same period last year, through September) while petroleum exports are 15.4% higher.  The US exported an average of 2.7 mm barrels of oil a day (June) just shy of its record 3.1mm barrels last December (export ban?).

Nevertheless cheaper energy will continue to stimulate lower income households and energy intensive industries such as airlines, chemical companies and utilities, creating a far greater net benefit for the economy over the long term.  Capital spending from the oil and gas industry totaled 0.8% of GDP last year up from just 0.3% in 2013.  This marks the highest level since the oil boom in the early 1980s even though cap ex will fall back next year due to lower oil prices.

Cheaper energy can solve the world’s problems, from effectively sanctioning Russia to alleviating income equality as oil companies lose profits and low income households gain discretionary income.  Not to mention bankrupting the numerous oil-cursed, economically and politically stagnant countries dependent on the commodity for income.  Lower oil can literally do it all.

2 thoughts on “The Crude Truth

  1. Saudia Arabia’s fiscal breakeven price of oil: $106, thanks to an increase in defense spending since 2011. And external price needed to balance trade: $70. With oil accounting for 44% of GDP, government reserves could be depleted by 2018 (and that is calculated with oil at $70). Low oil hurts the Saudis just as much as everyone else. Oil & Gas as a percentage of GDP (IEA data):

    Kuwait: 59%
    Saudia Arabia: 44%
    Qatar: 31%
    Venezuela: 23%
    Nigeria: 17%
    Ecuador: 15%

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