Be Careful What Your Wish For: Has Shale Oil Been the Basis for a Decade of Economic Prosperity?

What Unrest in the Middle East Once Meant

Watching a movie last night, my mind was jogged to a memory from the early 1970s. I was just a young girl, but seeing my father siphon gasoline —literally sucking on a hose until he pulled it to the surface (and presumably into his mouth) so that it would flow into our car— made an indelible impression.

Only around 40% of our population today is old enough to potentially recall the stupefying impact of the oil embargo of 1973. Despite having assigned days, the lines of cars extended sometimes for miles as no one wanted to risk running out of gas before their next day (as apparently had my father). And of course, no one could be completely certain that there would be any gas the next time.

A Seattle resident, reminiscing decades later “You would rise before dawn; climb into a cold car; drive, slowly, to a gas station with windows unlighted and pumps still locked; get in line behind the people who had left home even earlier; turn off the engine to save gas; pull your jacket up around your neck; settle down and wait until somebody arrived to turn on the lights, unlock the pumps and maybe let you buy a little gas. These lines could be truly morale crushing—measurable not in blocks, but in miles.”(1)

Shale Oil Has Insulated Us from a Repeat Performance

The events of the last week have clearly shaken the world, its markets, and are quite simply terrifying, especially so given the less than stable temperaments of many of the world leaders involved.

We as a world population sit in this protracted unease, as if all the globe rests on unsettled tectonic plates and we await the next inevitable seismic shift. The enormity of the geopolitical risks truly cannot be understated.

But there has been another seismic shift under our feet here at home: over the past decade the U.S. production of oil has made us self-sufficient. In November 2019, the U.S. became a net exporter of fossil fuels, for the first time since perhaps the 1940s.

Due to the complexities of the industry, we do still import from various regions around the world, but the amounts are extremely low relative to our overall consumption. For example, imports from Iraq currently account for less than 2% of US production, down from a peak of over 20% in the fall of 2001. And the Persian Gulf as a whole? Less than 6%, down from a 2003 peak in excess of 50%.

Being largely energy self-sufficient, from an economic point-of-view, has clearly demonstrable benefits.

The environmental ramifications, on the other hand, are yet to be seen. However, the destructive impact of greenhouse emissions is the same, whether oil is at $60 per barrel or $160, far from the reality for the world’s economies. If we really mean to be serious about curbing climate change, then enacting legislation that encourages a much more aggressive expansion of renewable energy and electric vehicles, for example, seems a far more successful strategy. Slap a tax on gasoline that doubles the price, then offer incentives that make electric and hybrid vehicles half their current cost - I imagine that would send the automobile industry scrambling to get some electric pick-up trucks on the roads pronto.

How Much Has Oil Independence Benefitted Our Economy?

Beyond insulating us from the specter of long gas lines, our dramatic increase in fossil fuel production seems to be an incontestable driver in our ongoing economic prosperity.

The fact that unemployment is at all time lows is a frequently touted statistics. But I have not seen anyone focusing on the correlation between its dramatic decade long decline follows the same trajectory as the reduction in the amount the American people spend importing fossil fuels. Although it is tremendously logical that dollars that are not being sent to bolster other economies can and have remained to enrich ours.

At its June 2008 peak, we as a nation spent almost $550 Billion importing fossil fuels. An extraordinary figure on its own, but even more so in context with what Americans spend on other types of goods and services. As of September, for example, Americans were on a run rate to spend $537 billion on all motor vehicles and parts in 2019. That we at one time were spending more on fossil fuel imports than we spent last year on gasoline and all energy is a truly staggering notion.

Growth Over Profits, A Tune We Have Heard Before

A lot of ink has been spilled lately regarding the precarious financial condition of the oil&gas drilling industry. Not say unlike so many tech and other startups, the emphasis as been on growth over profitability, saddling the industry with an estimated $200 billion in debt scheduled to come due over the next four years. Not to mention how by-in-large the energy sector stocks have been plagued with woeful underperformance.

Energy Producers Face Big Tab After Shale Bonanza, The Wall Street Journal, January 2, 2020

Banks Get Tougher On Shale Loans: Oil and gas companies face a higher bar to borrow after wells fail to meet expectations, The Wall Street Journal, December 23, 2019

Shale Cools, Takes Toll On Economy: In regions dependent on oil drilling, hiring is frozen, overtime is cut, hotels are empty., The Wall Street Journal, December 16, 2019

How Much of the Last Decade’s Prosperity Do We Really Owe to Oil Production?

While we fully recognize that correlation and causation are far from the same thing, it is difficult not to take a step back and ponder the extraordinary tight correlations between the increase in domestic oil production of the past decade and the explosive performance of the S&P 500.

Investors many not be enthralled with the returns flowing out of the Permian Basin, but it would appear that the overall market has been taking a rather different view. So as banks and investors begin clamoring for a reduction in drilling, they may want to pause and reflect upon the impact of the economy at large. As I used to tell my kids when they began sniffing around the existence of Santa Claus, “Be careful what you wish for.”

Notes:

(1) https://www.insidehook.com/article/history/another-oil-crisis