The Obenour oil well in McKenzie County, North Dakota
In May of 2014, a barrel of crude oil cost over $105 — just another sign that the global economy was, slowly but surely, digging itself out of the massive post-crisis hole it fell into. North America, in particular, was booming. Everything pointed to a secure and stable few years of confident growth.
Fast-forward to the present day, and oil is hovering just under $50 per barrel. The Canadian Dollar has fallen over twenty cents against its American counterpart over the past year. The Russian Rouble is on the verge of collapse. The entire European Union, already under extreme strain from its pipe cleaners-and-hot-glue fix to the sovereign debt crisis, is groaning as economic growth slows down again and Germany refuses to reinvest from its massive trade surpluses.
But America, strangely, seems to be weathering the storm rather well. The value of the greenback is skyrocketing, growth continues to be impressive, and unemployment continues to fall. How is it that America is being spared from the terrors of an oil-price roller coaster? The answer is depressingly simple — they’re in the driver’s seat, and the driver almost never feels the pain of their own rough ride.
The Weight of “Energy Independence”
For the past decade or so, public opinion in the United States has resolved that the time has come for America to become “energy independent.” What on earth does that mean? To most Americans, it means they become entirely (or at least mostly) self-sufficient in producing their own energy, especially when it comes to oil. There are, however, a number of different factors that contribute to the heightened importance of this issue among American voters. On the left, it’s largely motivated by protectionists who never wanted America to become so entangled in global markets and imports in the first place. On the right, it’s largely motivated by the (false) understanding that America gets a lot of its oil from the Middle East (it doesn’t — close to half of its imported oil comes from Canada), and the idea of Muslims holding the keys to America’s energy is too much for colourful figures like Ted Cruz or Donald Trump to take.
Whatever their reasons, it has become commonplace to see nearly every major politician in America, from Hillary Clinton to Rand Paul, sitting on a stool in some mom-and-pop coffee shop in New Hampshire, talking about how America needs to become self-sufficient in producing energy.
For a long time, that was just some abstract phrase people could call upon to get elected, since America didn’t really have a lot of easily accessible oil that they weren’t already drawing — certainly not enough to fulfill its national energy needs. But then, someone discovered that if you repeatedly slam something sharp into rocks deep underground, you can sometimes find trace amounts of oil there. Behold the magic of fracking.
The fracking phenomenon hasn’t been entirely limited to the United States — some companies in Atlantic Canada and Wales have discussed the possibility, too — but due to the enormous expense and potential environmental risks (which people in Atlantic Canada and Wales are far more likely to be concerned about than people in, say, Texas), it’s only in the U.S. that hydraulic fracturing has won a significant share of the oil-production market.
The Fracking Economy
About eighteen months ago, fracking really started to take off. Then OPEC decided that they wouldn’t limit their collective oil output. A year later, we’re seeing a problem with America becoming energy-independent: there’s too much oil for sale. With the landmark peace deal with Iran, the door has just been thrown open for even more cheap Middle Eastern oil to come pouring into the global market.
As mentioned earlier, the United States hasn’t really noticed much of a problem with this. After all, it has never been a country that exports very much oil at all (less than 10% over the past decade), and with almost all of its oil production going to domestic markets, lower oil prices can only benefit the U.S., since it doesn’t have to pay to export it around the world, and its primary consumers also happen to be its own producers. The U.S. also has an economy that shrugs off small industries like energy production, so the U.S. dollar isn’t intrinsically linked to a barrel of crude.
So it was perhaps amusing (if frustrating) to watch the American media extol fracking for allowing the price of oil to drop so much a year ago, while the rest of the world largely went into an unmitigated panic. The Canadian Dollar fell by about twenty cents against its southern counterpart over the course of the late 2015 oil plunge — one of its fastest collapses in recent memory. So shocking was the fall in oil prices to the Canadian economy that Alberta, which produces the bulk of Canada’s oil, elected a left-of-centre government for the first time in a century this spring.
And so, we are left with this new W-trend (it works just like it sounds — oil prices crash, they tick back up again quickly, more oil enters the market, oil prices crash again). After the collapse in oil prices, a lot of North American oil producers shut down temporarily, especially those with more expensive production methods — notably, around half of the Alberta Oil Sands and many U.S. shale (fracking) producers.
Doug Porter, Chief Economist at Bank of Montreal Capital Markets, predicts that oil will stabilize briefly at around US$65 per barrel in 2016. But many other economists warn that if it gets much higher than that, many U.S. frackers will get back online, and flood the market with oil again, which is sure to cause a crash akin to the one last year.
This spells frustrating volatility for the foreseeable future in economies like Canada and Russia, which spend not insignificant amounts to harvest their oil, already exist in tepid economies, and export the majority of their crude. The two places that won’t really feel much of an impact with this new era of volatility are the United States and the Middle East, albeit for entirely different reasons. Since the United States doesn’t export over 90% of its oil, it can only benefit from low international prices, combined with its accelerating economy. The Middle East, on the other hand, exports the vast majority of its oil, but the barrels it produces are among the cheapest in the world — most Middle Eastern refineries can still turn a fairly substantial profit off of even US$20 oil. And of course, it’s those two regions that hold the steering wheel in the global market — the ones that can flood the market with oil it doesn’t need for the purposes of domestic politics, and the market that will pretty much make a profit no matter what prices look like.
Benson Cook is a first-year student at McGill University, studying Political Science.
Image Attribution: “Bernice 1 and 2 wells with moisture flare – Arnegard North Dakota” by Tim Evanson, licensed under CC BY-SA 2.0
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