Oil prices flirted with the $50 per barrel line this week, causing U.S. consumers to begin looking for further deflation at the gas pump. Americans are increasingly unafraid to hit the roads as driving becomes cheaper. In a tweet, President Trump compared this to a tax cut and urged Saudi Arabia to let prices fall even lower.
But doing so would not be as worry free as it was, say, a decade or two ago.
The United States today is, according to recent estimates, the world's leading oil producer, having surpassed output in Saudi Arabia and Russia, thanks to the recent boom in shale production. But that means large sections of the country, most notably in the oil-rich Midwest, are increasingly economically dependent on oil production. Lower prices means smaller paychecks, less profitability and fewer jobs in those regions.
It also incentivizes Americans to buy more trucks and SUVs, furthering the demise of sedans and smaller vehicles — a factor in recent layoffs by General Motors.
The good news for consumers, as the Washington Post recently reported, is that shale production can be stopped and started more quickly than traditional oil wells. This nimbleness is likely to keep a downward pressure on prices. If the Saudis and Russians cut production, U.S. shale wells can ramp up quickly to take advantage of price increases, thereby pushing prices down again.
The bad news is that any enterprise relying on oil prices will find itself in a world of perpetual volatility. That's nothing new in the oil industry, but the effects are more acute as economies grow reliant on energy production.
As a side note, Utah lawmakers have pressed in recent years for the federal government to turn its public lands over to the state. But fluctuating oil prices ought to give them pause.
An analysis commissioned in 2013 by the Utah Public Lands Policy Coordinating Office estimated the state would need about $280 million a year to manage lands now under federal control in Utah. That might not be a drain on taxpayers if the land generated significant royalties from energy production. However, the study said oil would need to sell at $60 a barrel or more for this to work.
With inflation, the price of managing the land certainly has grown during the past five years, as has the minimum barrel price for breaking even. And yet oil has frequently traded at below $60 a barrel, as it is at the time of this writing. Taking control of all federal land in Utah would put Utah taxpayers at risk.
Given the factors at play, especially international events and natural catastrophes, predicting future oil prices is impossible. What is certain is that U.S. production, spurred by technological advances, has affected world prices and kept the gloomy predictions of $5 a gallon gas at bay.
This also has curbed market demand for alternative, cleaner, energy sources.
Lower oil prices, then, is both good and bad news. Experts say there is a sweet spot, where producers can be profitable and demand can remain high. Maintaining that level in a volatile world can be like catching lightning in a bottle.
However, pushing for even lower oil prices right now is not prudent because of the risks involved.