Low gas prices: A mixed bag

All of us who drive are rejoicing in the lowest gasoline prices in years — below $2 a gallon around here.

Travelers, businesses, delivery companies and many others are benefiting from cheaper gas.

For the average American who drives a car, the price drop is the equivalent of about a three-percent wage increase.

The 50-plus percent decline in the price of gasoline is a result of a sharp drop in the price of crude oil — from $110 a barrel just a few months ago to below $50.

Such a wrenching change significantly affects energy production, the worldwide economy, financial markets and international relations as well as the price at the gas pump. But the effects are different for different sectors and different nations.

There are winners and losers.

Among the losers is the North American fracking shale oil production boom.

High oil prices justify the $70-$80 a barrel cost of a shale oil well project. It’s not hard to see what $50 oil does to such a project. Once the well is constructed, the cost of production is much less, about $10 a barrel. But the lifespan of a shale oil fracking well is generally less than two years. If oil prices remain low for any length of time, shale oil will cease to be a player in the world oil market.

That’s exactly what Saudi Arabia has in mind.

In November, the Organization of Petroleum Exporting Countries (the OPEC cartel) met to consider restricting supply because of the price-dropping effect of American shale oil production on the world market.

Saudi Arabia, the world’s largest oil producer at 10 million barrels a day, said no to any change, and continues to produce at its traditional levels. The cost to produce a barrel of oil in Saudi Arabia is only $5 or $6 a barrel, so an international price of $50 a barrel reduces the Saudis’ profit margin but leaves its oil sector in the healthy black at the bottom line.

The resulting glut on the world market dropped the price to what we see today.

Saudi Arabia has hundreds of billions of dollars in reserves in its national treasury, and can weather lower oil prices for a long time. But American shale oil producers, which are highly leveraged with debt against their production investments, can’t.

It’s good old capitalist competition at its most vicious, and there appears nothing to stop Saudi Arabia from driving much of American production off the playing field.

But for American foreign policy, the spin is different.

Low oil prices hurt three of the United States’ most troublesome opponents: Russia, Iran and Venezuela.

All three depend greatly on their oil exports to maintain their economies, and all three are hurting significantly right now because of Saudi Arabia’s decision. It may be in the U.S. national interest to support low oil prices for the foreseeable future, especially because they’re so popular among American consumers.

On the other hand, the situation is not so good for North Dakota, Alaska and Texas, where the relatively high cost of fracking projects puts those states’ economic future in doubt.

Texas has a diversified economy and will probably withstand an oil downturn all right. Alaska and North Dakota are another matter. America doesn’t export its oil, but oil imported into the American market can certainly replace domestic oil at these prices.

Then there’s the effect of low gasoline prices on a potential increase in Iowa’s gas tax.

Opponents of a gas tax increase to shore up the state’s crumbling roads and bridges have for several years claimed that gas prices are already too high, and that another 10 cents or so tacked onto the price would be damaging and unwise. But with the price of gasoline below $2 a gallon, that argument loses momentum, to say the least.

It’s an opportunity for the Iowa Legislature and the governor to seize the moment with lower political cost than they have risked for several years, and it gives politicians the opening they claim they want to accomplish some bipartisan good in the state.

The Senate remains in Democratic control, with the House and the governor’s office dominated by Republicans.

The outlook for improving Iowa roads through political cooperation hasn’t been this bright for a long time. Let’s see if our leaders are up to the task.

Contact Us

Jefferson Bee & Herald
Address: 200 N. Wilson St.
Jefferson, IA 50129

Phone:(515) 386-4161