How the U.S. Govt. Helped Smash the Oil Cartel

By Shlomo Maital

oil

With the price of oil below $50, and likely to remain low for quite some time, with $100 oil unlikely to return,  it is interesting to discover why.  The main reason?  America is now the world’s biggest oil producer, topping Saudi Arabia, because of fracking and frantic drilling – and the Saudis choose not to fall on their swords and slash their production.  

    But WHY has America been able to produce so much oil?  The answer is in Eduardo Porter’s piece in today’s Global New York Times (“Behind drop in oil prices, the hand of Washington”).  It is:   U.S. government policy and funding, dating back to Nixon, Reagan and the elder Bush.     “Facing years of a broad energy shortage, in the shadow of an embargo by Arab oil producers [in 1973], Nixon..and Congress laid the foundation of an industrial policy that over …four decades developed the technologies needed to unleash American shale oil and natural gas onto world markets”.    Porter cites a scholar who notes, “public investments in technology innovation [e.g. energy] can bring a huge benefit for both the economy and the environment”.

    Congress approved the Prudhoe pipeline from Alaska just weeks after the Arab embargo.   The 1974 Energy Act, creating the Dept. of Energy, kick-started a period of heavy government investment in R&D to recover gas from shale. This agency provided the funds to develop ‘horizontal drilling’ and polycrystalline diamond compact bits to cut through the shale, and performed the first big proof of concept hydraulic fracking, while Energy Dept. labs created a multi-well fracking site.  The inventor of shale fracking, George Mitchell, got a lot of help from the government.  And, the Reagan Administration, earlier, abolished price regulation, to remove a major barrier to unconventional development of gas deposits. 

    Of course, bold entrepreneurs who took risks and invested in fracking deserve credit.  But as in many new technologies, the hand of government, in regulation and investment, was highly visible. 

     A key point is that even if rock-bottom oil prices drive oil shale producers out of business for now,  the ability to quickly revive oil shale output will put a ceiling on oil prices that is far below the record $111 peak.    Saudi Arabia can produce oil at a marginal cost of $5 to $8 a barrel, enabling it to smash prices lower.  But America’s ability to produce virtually infinite amounts of fracked shale oil at a marginal cost of around $58 will help keep crude oil prices reasonable in the near future. 

     Let’s keep in mind, however, that persisting low oil prices will bankrupt countries like Russia, Iran, Venezuela, and others.  This may not be good news.  Russia is already looking for creative ways to make trouble for America, in Yemen and in Iran,  out of spite for America’s lead in imposing sanctions on Russia.  The world will remain unstable, despite low oil prices and in part because of them.

 

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