Washington Merry-Go-Round

Oil politics

IMMEDIATE RELEASE 31 December 2014

WASHINGTON MERRY-GO-ROUND

Today’s Events in Historical Perspective

America’s Longest-Running Column, Founded 1932

Oil politics

By Douglas Cohn and Eleanor Clift

WASHINGTON – Did you know that the United States is on the verge of becoming energy independent? And do you know who should get the credit for this remarkable turn of events?

President Obama gets a share because he has pushed policies to reduce U.S. demand and to promote an “all of the above” attitude toward energy production.

Still, the bulk of the credit goes to an industry that doesn’t top the list of Obama’s favorite corporate citizens, and that’s the oil companies. They did the exploration that led to the advent of shale oil and the invigoration of the domestic oil market.

Without glossing over the environmental concerns with the process to extract shale oil known as fracking, this newly discovered source of oil has revolutionized energy production. Can you guess which country is most upset with America’s new muscle in the global energy market?

The answer of course is the oil kingdom of Saudi Arabia, which is threatened by a newly competitive U.S. market. In the past, when demand for oil went down, the Saudis would adjust their output so prices remained stable. They’re responding differently this time, keeping their production at a high level and watching the price of oil tumble from $110 a barrel down to half that.

It doesn’t make sense from a supply-and-demand perspective, but that’s not what the Saudis have in mind. They’re pumping away in order to lower the price of shale oil. It becomes obvious when we do the math. The Saudis can extract oil from the ground for under $10 a barrel. The figure to extract shale is at least four times that, at $40 or $50 a barrel.

How low can Saudi production drive down the price of oil, and at what point will shale oil producers cry uncle?

At a recent OPEC meeting where ministers and others from the major oil producing countries gathered, members were asked to cut back production. The Saudis refused, but so did the Russians, and the Venezuelans. Why? Their economies are tanking, and they are so dependent on oil revenue that they can’t back off.

Improvements in U.S. oil technology, and new oil findings especially in North Dakota have transformed energy markets. Between technology, price, and discovery, American oil production has dramatically increased, and the U.S. is on the verge of declaring itself independent of foreign oil.

There’s another pressure point and that’s China, and its growing thirst for oil. China has turned in a single generation from a bicycle population to an automobile economy, and its demand for oil has kept the price up. In a global economy, it’s like a seesaw, as U.S. demand for foreign oil goes down, China’s goes up.

Can the Saudis drive down the price of oil fast enough to make the U.S. production of shale oil non-competitive, or will China’s needs and demands keep the price up?

In this global chess game, the U.S. with its soaring economy is a dominant player. Because wages have been stagnant, many Americans haven’t felt the impact of an improving economy in their lives. That should change with lower gas prices at the pump.

If people have more money in their pocket, they’re likely to feel better about their leaders. Obama will be judged on his handling of the economy, and while the recovery has been slow and tepid, it seems finally to be taking hold. If the newly soaring U.S. economy and its strengthening dollar can help pull Europe out of its doldrums, that may get Obama the credit that has so far eluded him.

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© 2014 U.S. News Syndicate, Inc.

Distributed by U.S. News Syndicate, Inc.

END WASHINGTON MERRY-GO-ROUND

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