Dumb Government Policies Frustrate Benefits of Falling Oil Prices

December 11, 2014 Updated: December 10, 2014

Falling gas prices add to holiday cheer, but it isn’t all good news for the U.S. economy, thanks to bad economic policy.

Oil selling at about $65 a barrel oil prices gives consumers and many businesses a lot of additional buying power, but it also puts a damper on the U.S. oil and gas boom.

For many U.S. wells, the break-even price is much lower—for some $40 a barrel—but in the Texas Panhandle, the Permian Basin in Texas, and New Mexico, and North Dakota’s Bakken fields, it can be as high as $75 to $80.

For now, U.S. oil production is likely to continue rising because once fields are built, revenue needs only cover day-to-day operating costs even if producers don’t recoup initial development costs. Going forward, producers will invest less in new drilling, and sales of drilling equipment have already started to drop.

The United States still imports more than 5 million barrels a day, and cheaper foreign oil adds about $75 billion to consumer purchasing power. However, the falloff in drilling activity will significantly subtract from the resulting pop to gross domestic product and the 1 million additional jobs that some economists are predicting.

Restrictions on new pipeline development—both Keystone and other east-west projects—are forcing North Dakota producers to ship by rail millions of barrels to East Coast refineries. This adds as much as $10 a barrel to handling and shipping costs, greatly increases environmental and insurance risks, and makes new U.S. drilling projects more vulnerable to prices in the $60 to $70 range for the next several years.

U.S. producers have made broad gains in exploration and development efficiency, thus lowering break-even prices substantially, but to exploit those, the oil and gas sector needs for Washington to acknowledge the facts. Pipeline development benefits both the environment and energy independence.

Effect on Other Countries

The European Union and Japan are more dependent on imported oil and should benefit even more from lower oil prices. However, various forms of stimulus, ranging from cheaper currencies against the dollar to low interest rates and central bank bond-buying strategies, have failed to revive their moribund economies because both suffer from low birth rates and aging populations, onerous labor market regulations, and other government policies that stifle business investment.

Government policy failures are also undermining growth in Brazil, China, and other developing economies. Those too precipitate cheaper currencies against the U.S. dollar.

Together, these conditions make U.S. exports more expensive and imports cheaper on American store shelves and widen the U.S. trade deficit. All subtract from the benefits that the U.S. economy may expect from cheaper oil imports.

Lower oil prices may instigate instability in countries such as Iran, Russia, and Venezuela, where rogue regimes heavily depend on petroleum dollars to finance their governments and imports.

That can’t help but add to U.S. security headaches and costs. Washington can either cut entitlement spending—don’t count on President Barack Obama doing that—or more likely, further trim investments in infrastructure, research and development, and the like.

Cheap oil can help revive the industrialized economies, though not in the face of pervasively dumb economic policies, but that has been the continuing story of this economic recovery.

The president keeps saying that the Keystone pipeline will take only Canadian oil to Gulf ports and create just a few thousand construction jobs, when it actually, along with other pipelines that the administration is blocking, would more effectively carry American oil to Gulf and East Coast refineries, support increased U.S. oil production and manufacturing jobs, and wean U.S. consumers from imports that support terrorism.

When the leader of the Free World is so blind to facts and deaf to reason, don’t criticize economists. Save that for the reasoning from the Oval Office.

Peter Morici, professor at the Robert H. Smith School of Business at the University of Maryland, is a recognized expert on economic policy and international economics. Previously he served as director of the Office of Economics at the U.S. International Trade Commission. Follow @pmorici1

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.