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Commentary

Next President Must Embrace Brave New World of Oil and Gas



Gasoline prices in several states are now under $2 per gallon. According to the American Automobile Association, drivers are saving more than $100 per month at the pump. Cheap oil, and consequently cheap gasoline, are providing enough economic leverage to offset the drag of a rapidly expanding public sector.

As presidential contenders bat around ideas to drive up gross domestic product growth or to refocus U.S. energy policy, we should hope they pay attention to the shale revolution and domestic oil production. Two-dollar gasoline isn’t an accident.

The resurgence of U.S. oil production—adding 4.5 million barrels per day since 2008—has turned world energy markets upside down. From the 1970s to just a few years ago, oil prices largely rose and fell at the whim of energy ministers for OPEC (Organization of the Petroleum Exporting Countries). That chapter in oil history appears, for the foreseeable future, to be closed.

Not only was OPEC taken by surprise by the shale revolution, but it is grasping at straws on how to respond to it. While OPEC members struggle with low oil prices—many of their economies are almost entirely built on oil export revenue—they begrudgingly are realizing that a return to $100-per-barrel oil simply is not in the cards.

OPEC—particularly its leader, Saudi Arabia—understands that should the organization, or at least some of its members, move to cut production to prop up oil prices, new U.S. production likely would match those cuts. So, instead of reducing production, OPEC members are increasing it. Their aim is to flood the marketplace, depress oil prices and kill off some higher-cost competitors.

While consumers certainly are benefiting from that strategy, drillers are not. It’s shared pain from the oil fields of the Middle East and the steppes of Russia to Texas and North Dakota. OPEC hoped that a year of depressed oil prices would send U.S. shale producers running, but the industry has proved far more resilient than had been assumed.

Even as the number of active U.S. drilling rigs has fallen by more than half in a year, production barely has slipped. OPEC is realizing that the U.S. oil and natural gas industry is a different animal than stodgy state-run oil and gas enterprises. Private domestic producers are remarkably nimble. Faced with falling prices, they have cut costs with more efficient drilling, honed in on the most productive acreage and increased production significantly from every new well they sink.

Much to OPEC’s chagrin, while a few overextended U.S. producers are folding, the industry at large is very much alive and kicking. In fact, a backlog of drilled but not-yet-producing wells continues to grow across the country. In North Dakota’s Bakken shale, for example, more than 1,000 wells have been sunk but not fracked. Should oil prices start to rise, companies quickly can bring those wells online. Prices can rise only so much before new sources of supply catch up.

The shale revolution has proved to be the deciding factor in breaking the grip of years of crushingly high oil prices. The benefit to American consumers is obvious. Yet, the Obama administration seems to be oblivious. Instead of embracing the shale industry, the White House is hitting it with a broadside of costly new regulations and threatening to veto a bill allowing oil exports. OPEC’s ministers and Vladimir Putin must be tickled pink.

If the Obama administration won’t acknowledge and embrace the value of the U.S. shale industry, let’s hope the next president can. Our future economic well-being depends on it.


William F. Shughart II is Research Director and Senior Fellow at the Independent Institute, J. Fish Smith Professor in Public Choice in the Jon M. Huntsman School of Business at Utah State University, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.


From William F. Shughart II
TAXING CHOICE: The Predatory Politics of Fiscal Discrimination
So-called “sin taxes”—the taxing of certain products, like alcohol and tobacco, that are deemed to be “politically incorrect”—have long been a favorite way for politicians to fund programs benefiting special interest groups. But this concept has been applied to such “sinful” products as soft drinks, margarine, telephone calls, airline tickets, and even fishing gear. What is the true record of this selective, often punitive, approach to taxation?







  • MyGovCost.org
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  • OnPower.org
  • elindependent.org