Posted by guest blogger Tom Flake
Anyone over twenty five years old probably remembers the left’s rebuttal during President George W. Bush’s initiative to drill in ANWAR, “We Can’t Just Drill Our Way To Lower Gas Prices”. In fact as recently as 2012 President Obama was still parroting, after ten years, what had become Gospel on the left. “We Can’t Just Drill Our Way to Lower Gas Prices” or a variation “We Can’t Drill Our Way to Prosperity”. It was also said, by the “Smart People”, in 2002 that it would take ten years to bring ANWAR oil online, somehow that was also justification to NOT start as soon as possible? For 14 years, the left has fought drilling, not just in ANWAR but on all public lands, everywhere. So entrepreneurs have done, what entrepreneurs do, they found a way to fill a market demand despite an obstructionist government. Drilling on private lands, developing new technology (fracking and horizontal drilling) entrepreneurs have created over 2.5 MILLION BARRELS PER DAY of new oil supply since 2002.
This whitepaper serves as an update to two articles published on “Brutally Honest”, Rick Rice’s blog and “The Right is Wrong and the Left is Wronger”, my blog. On October 19, 2010 I published “The Looming Currency War” and on March 11, 2011 I published “Enough Oil to Completely Replace All Imports” this whitepaper serves to update the status of those two situation and to unify the thesis for the next five to ten years.
In economic terms demand for oil is considered inelastic. If prices go up, consumers cannot change their demand behaviors quickly and thus must shift demand from other goods to make up for the increased cost. It is also (largely) supply inelastic, it is rare when large new supplies come online. The end of 2014 saw a perfect storm more supply came online in the middle east, exerting downward prices on oil, U.S drilling rose to a crescendo bringing on additional supply, while economies contracted in Japan and Europe concurrent with a decreased rate of growth in China all of which decreased demand. This while central bankers across the globe took actions that strengthened the dollar. All of this reduced the cost of oil to Americans and for the first time in decades America produced more oil than it consumed. Gas prices plummeted from $90 per barrel to $50 per barrel. It turns out that you can, drill your way to lower gas prices.
During the six years of the Obama Administration, 5.98 Million jobs have been created. During that period approx 200,000 direct and 1.2 Million indirect or induced jobs have been created in Oil and Gas. About 20% of all net new jobs created during the Obama Administration have been created in an industry they fought tooth and nail to prevent. It turns out you can drill your way to prosperity. But… how much prosperity?
It is possible that in the entire history of being wrong, never before, have so many, been so wrong, so publicly, to the detriment, of so many. What should we expect? America’s oil is more difficult to reach than the oil in Argentina, Saudi Arabia, or Russia. Our cost of extraction varies but is about $60 per barrel. As I write this oil is trading at about $49 per barrel and drilling rigs across American are being idled. American’s should expect that oil won’t stay at $49 per barrel for long. However, as soon as oil goes above $60 per barrel those same rigs that are idled now will be re-employed. We should expect oil to hover around $60 per barrel for the next decade or more. How much impact will that have?
The Economic Stimulus Act of 2008, enacted February 13, 2008) was an Act of Congress providing for several kinds of economic stimuli intended to boost the United States economy in 2008 and to avert a recession, or ameliorate economic conditions. The stimulus package was passed by the U.S. House of Representatives on January 29, 2008, and in a slightly different version by the U.S. Senate on February 7, 2008. The Senate version was then approved in the House the same day. It was signed into law on February 13, 2008 by President Bush with the support of both Democratic and Republican lawmakers. The law provides for tax rebates to low- and middle-income U.S. taxpayers, tax incentives to stimulate business investment, and an increase in the limits imposed on mortgages eligible for purchase by government-sponsored enterprises (e.g., Fannie Mae and Freddie Mac). The total cost of this bill was projected at $152 billion for 2008.(Emphasis added)
Thus Congress and the President felt that they could avert or ameliorate the effects of an economic downturn by adding $152 Billion in economic stimulus to the economy. So how does oil dropping from $90 per barrel to $50 per barrel compare?
In 2013, the United States consumed a total of 6.89 billion barrels of petroleum products, an average of 18.89 million barrels per day. This total includes about 0.32 billion barrels of biofuels. At $90 per barrel this is about $620 Billion at $50 per barrel this is about $345 Billion, a difference of $275 Billion. This is like having 1.8 Economic Stimulus Acts of 2008 enacted every year that oil remains around $50 per barrel.
If we can assume that oil will stay in the $50 range for five years (I believe it could be in the $50-$60 range for a decade or more), this injects $1.375 Trillion of stimulus into the economy. Moreover, it is $1.375 Trillion less going to support economies that hate us. If you assume the population of the US is 350M that is almost $4000 for every man women and child in increased disposable income to spend on things other than oil. That $1.375 trillion will be spent on travel, hotels, cloths, education. In an economy with a $17.5 Trillion GDP that is an almost 2% direct bump. If you assume a 5:1 velocity of money, that is the money gets spent and then re-spent five times in a year. This is a really big number $6.875 Trillion over five years. This is more money than all of the quantitative easings that the Fed engaged in over the last five years, combined!
It turns out that not only can you drill your way to lower gas prices. Not only can you drill your way to prosperity. You may in fact be able to drill your way to uncontrollable hyper-inflation. You see the Fed has over $4 Trillion on its balance sheet, other party debt that they purchased to inject liquidity in the market. But they aren’t talking about divesting this debt. Instead they are talking about raising the Federal Funds rate, the rate banks charge each other for short term loans. It currently sits at zero and they are hotly debating whether to raise it to 0.25% by late this year and Wall Street is on pins an needles. What NO ONE is talking about is that the cost of gas started decreasing in October of last year and really plummeted starting in December. We are about ¼ of a year into what I am calling QE-petrol. This means effectively $458 Billion has already been directly injected into the economy, which at a 5:1 velocity of money means that over $2 Trillion of spending has been injected into the economy.
If you listen to CNBC you can’t listen for long without hearing that retailers are having the best most profitable time that anyone can remember. “Strange” they comment, “Where is all this money coming from”? By the time the Fed acts, it will be too little, too late. They need to be divesting the debt on their balance sheet to sop up the excess liquidity being caused by the reduced cost of petroleum not arguing over a 0.25 increase in the funds rate. AND keep in mind this is only the first ¼ of the first year of what I project will be a five to ten year trend. It will start with extreme prosperity, but because the Fed reacts too slowly it will end with hyper inflation and a crash. Invest heavily now while the market increases but be prepared to pull your money prior to a crash in 3-5 years.