Are You Ready for $5 Gas?

In a version of "hit 'em while they're down,' the Obama administration has unleashed a slew of new regulations targeting U.S. oil and gas production.  These include costly methane emission rules on all new and existing wells, reversals of promised offshore acreage leasing, a de facto freeze of leasing on federal lands, and burdensome EPA restrictions of fracking.  Then there is Obama's recent budget proposal of a $10-per-barrel surtax on top of the high taxes and royalties already paid by oil companies.  Just as low oil prices are driving hundreds of oil companies out of business, Obama is piling on in an apparent effort to drive even more into bankruptcy.

Restrictions on drilling don't hurt consumers so much when the world is awash in oil, as it has been since 2014.  The problem is that prices don't remain low for long.  Low prices result in reduced investment, which results in less production.  And less production results in higher prices.  As every economist knows, commodities are cyclical businesses.  A wise national energy policy would anticipate volatility by promoting lower production costs in both good times and bad, thereby reducing future price shocks.  Obama's energy policy has pursued the opposite path.

Oil prices appear to be at an inflection point, and the administration hasn't a clue as to how to respond.  With cuts in non-OPEC production of 730,000 barrels per day in 2016, according to an OPEC report issued Wednesday, global surplus production is expected to end within two months.  After that, stockpiles may begin to decline, unless global demand continues to lag, as it has of late.  On the demand side, the OPEC report simply states that "there is great uncertainty."  Obama's response to this uncertainty – as to the clear evidence of declining production outside OPEC – is politics as usual.  When production is high, he attacks fossil fuels.  When production is low, he continues to attack them.

The most significant data in the OPEC report point to an increasing pace of decline in non-OPEC production.  A 15% decline from recent highs, in and of itself, might not be that worrisome.  But a 15% decline that becomes 20% and then 25% by the end of the year, as is possible, would most likely affect global oil prices and perhaps threaten the global economy.  With so many regions already facing uncertainly, a global recession could easily unsettle world politics.  It is in our interest to stabilize energy prices, but the administration seems intent on driving them up.

No one can predict the future of the oil market, of course.  Exogenous factors, including the potential collapse of a proposed OPEC production freeze or a global economic slowdown, not to mention the outbreak of war or regime change, could influence prices one way or the other.  With hundreds of producers, an uncertain global economy, and political instability, predicting oil prices is a risky bet.  The re-entry of Iran as a major producer is another factor in the mix. 

Nonetheless, it is possible to extrapolate from known facts and to make conservative predictions.  Non-OPEC production is falling.  If an agreement can be ironed out at the forthcoming Doha meeting of OPEC producers or at a subsequent meeting, OPEC production might be frozen at current levels.  The U.S. Energy Information Administration has lowered its forecast for U.S. production for 2017 to 8 million barrels per day – down from 9.4 million bpd for 2015.  Despite having the world's largest proven oil reserves, Venezuela has seen its production continue to decline since 2005.  The International Energy Agency recently downgraded projections for Brazil's production in 2016.  Mexico, another major producer, has seen its production "steadily decreased since 2005," according to the IEA.

The idea that U.S. production cuts, resulting partly from government policy, have no effect on global prices is mistaken.  Given the effect of maturing fields and declines resulting from mismanagement in Latin America and elsewhere, there may not be enough slack to make up for falling U.S. production.

Obama's assault on the U.S. oil industry has also contributed to job losses and losses to U.S. GDP.  Just as his all-out war on coal has cost 31,000 good-paying jobs and $30 billion in market losses, at the end of 2015, job losses in oil and gas were estimated to be "250,000 and counting."  Not all of these could have been prevented by government policy, but many of them could.  If Obama had taken the opposite tack – backing "all of the above," as he promised to do – the oil and gas industry would have held up better, and Americans would be spared future price increases to some degree.  Lowering regulation and opening up leasing on federal lands would have lowered the cost of production for U.S. companies.  As it is, Obama has allowed Middle East producers to undercut U.S. producers and gain market share, resulting in fewer jobs for American workers and more U.S. dependence on foreign producers.

Looking ahead, oil price forecasts for 2020 range from $68.50 (IMF) to $74.10 (World Bank).  With WTI crude now going for just above $40 a barrel, those forecasts suggest a 75% increase above current prices and a 150% increase over recent lows.  No one is suggesting that U.S. energy policy can control global oil prices, but it can lower U.S. production costs, make U.S. producers more competitive, and increase global supplies, thereby moderating price spikes.

Obama understands none of this because he sees the world through eco-colored glasses.  There is no evidence that Hillary Clinton would be at all different.  She too supports the total ban on fracking in New York State and elsewhere.

Killing the fossil fuel industry in the U.S. has been the unspoken agenda of the Obama administration for the past seven years.  It is also the agenda of environmental groups such as the Sierra Club, whose executive director (Michael Brune) recently said that the club's goal is "to phase out coal as quickly as possible" and also to "use as little natural gas as we can in doing so."  As for oil, environmentalists seem even more opposed to its use than natural gas, despite the fact that both are the only efficient and dependable sources of fuel available at affordable prices.

Another voice in the anti-carbon crusade is U.N. Secretary General Ban Ki-moon (whose term, thankfully, expires in December).  In an interview with Kimberley Strassel of the Wall Street Journal, the secretary general was quoted as saying that climate change "should not be a subject of political debate" in the U.S.  He followed up by saying that if the U.S. Congress refuses to pass legislation supporting the Paris climate accord of 2016, President Obama "may not have to do all this legally[.] … He also has executive power."  Is Ban Ki-moon saying that the American people have no right to debate climate change and that the president should circumvent Congress to force his views on the people?  That is what I hear him saying, and what many in the environmental movement appear to support.

Now that the president and his environmental allies have partially succeeded in hampering oil production, the effects of that policy can be seen.  Oil prices are rising, and gasoline prices are rising with them.  Most Americans aren't happy about that, and, hopefully, they will make their displeasure known in the 2016 election.  The choice between Hillary Clinton and a conservative opponent would give voters a chance to make their wishes known.  

As for Hillary Clinton, her intentions are painfully obvious.  She has spoken of seizing the profits of oil companies and investing them in green energy schemes like Solyndra and SunEdison.  Without profits, energy companies would have nothing to invest in new production.  As existing wells became depleted, production would fall, ultimately to zero

That, of course, is precisely what the environmental left wants.  But it is not the future that most Americans would hope for.   

It is not too late to reverse policy, though the chance of this administration doing so is zero.  A new administration, with a conservative in the White House, could unravel the punishing regulations imposed on the oil and gas (and coal) industries and thereby assure a long-term supply of cheap and efficient energy.  That supply would help to assure long-term economic growth and prosperity – and increased income equality – for all Americans.

Jeffrey Folks is the author of many books and articles on American culture, including Heartland of the Imagination (2011).