Fracking Drives Global Oil Prices Down
One of the perennial arguments of the anti-fracking crowd has been that the shale revolution has failed to bring down oil prices. If the huge investment in fracking hasn’t lowered prices for U.S. consumers, what’s the good of fracking?
Now that argument has gone the way of all the other objections to fracking. When OPEC failed to cut production last month, one of the main reasons was competition from swelling production in the U.S. Reportedly, Saudi Arabia blocked production cuts (which would have raised prices) due to fear of losing market share. It wasn’t just Russia or Iran they were worried about. The biggest new competitor on the block is the U.S.
Since the fracking revolution began, U.S. production has increased from 5 million barrels per day at the end of 2008 to 8.5 million bpd as recently as June 2014. That increased supply is enough to move prices on a global market that consumes 92 million bpd. Technological advances suggest that 2015 will be another year of surging production before the effects of lower oil prices depress new drilling. But once oil prices rise, new drilling will soon follow, once again stabilizing prices.
The real question is what would have happened in the absence of North American fracking. Without the additional supplies coming on the market, today’s prices would almost certainly be above $100 per barrel, and quite possibly closer to $120. Those prices are enough to undermine global growth. The U.S. would not have escaped the effects of a global recession.
Fracking has also driven down the price of natural gas in the U.S. – a benefit that has existed since 2008 but that has been ignored by fracking opponents. Natural gas production has increased by 32% since 2005. Again, the advantages are huge: lower costs for electrical generation, home and office heating, and industrial usages. By the end of 2015, when U.S. producers begin exporting liquefied natural gas, Europe and Asia will begin to enjoy the same advantages. As the global economy improves in Japan and the EU, American workers will share in the prosperity.
Furthermore, these advantages are durable. With the rapid improvement in fracking technology, each year more oil and gas are recovered per well. The recovery rate for a conventional well was as low as 10%. It is now above 40% with higher recovery rates on the way. It is estimated that U.S. natural gas reserves are enough to supply the nation for another half-century.
For fracking skeptics, the crucial takeaway should be that fracking has driven energy prices lower, and it is fracking that will restrain prices in the future. The anti-fracking activist will then ask: what difference do lower energy prices make? The answer is that they make the difference between growth and recession.
Burdened by high energy prices, both the EU and Japan have been plagued by low or negative growth for decades. Both economies have been slipping back into recession. The U.S. has done better, entirely as a result of lower energy prices. As of October 2014, unemployment in the EU stood at 10% versus 5.8% in the U.S. Those numbers translate into suffering for millions of human beings.
Remarkably, the estimated 3% improvement in GDP growth attributable to lower U.S. energy prices accounts for all of the nation’s GDP growth over the past 6 years. This difference of 3% translates into higher living standards for millions. It is callous for those who oppose fracking on ideological grounds to ignore the effects of energy prices on working men and women.
Good things are coming from America’s shale revolution, and they should continue for decades – as long as environmentalists don’t mess it up. Not only has fracking brought about lower prices for consumers and businesses; it has created an estimated 3.2 million jobs. Most of the job growth of the past 6 years has been within, or in support of, the energy sector. The industrial renaissance in this country, including the expansion of the chemical industry, depends on the availability of cheap and reliable energy.
Now that they’ve lost the argument over the effect of fracking on global oil prices, fracking deniers will undoubtedly shift to some new objection, however far-fetched. It’s never about reality with the environmental left. The objections are simply contrived to support an irrational bias against carbon fuels and an underlying bias against development of all kinds. Who knows where the left will turn now? Maybe they’ll argue that fracking is disrupting global markets by driving the price of oil to dangerously low levels.
At least that argument would have some basis in fact. According to reports, the Saudis are prepared to see the global oil price drop as low as $60 a barrel. At that price, weaker competitors in North America and elsewhere would cut back production, and Saudi Arabia would retain their prized market share while at the same time weakening their political rivals, Iran and Russia. The geopolitical consequences of this action are unpredictable. Destabilizing Putin or the leadership in Iran is a dangerous game that could result either in more internal repression or in external threats to the neighbors of these regimes.
These risks are real enough, but they are offset by the advantages of cheap oil to the global economy. Without fracking, the world’s major economies would already have slipped back into recession or worse. The U.S. would not have been immune.
Fracking deniers have struck out again. Oil prices are falling because of increased U.S. production made possible by fracking. Fracking has not only lowered prices for U.S. consumers – it’s had a huge impact on global oil prices. And as the global economy benefits from lower prices, the U.S. economy enjoys even more growth, more jobs, and more prosperity. It’s time for the anti-fracking mob to admit what’s obvious to the rest of us: the shale revolution is real, and its benefits are enormous.
Jeffrey Folks is the author of many books and articles on American politics and culture, including Heartland of the Imagination (2011).