12.16.2014 1

Oil price stimulus is better than Obama stimulus

oil_moneyBy Rick Manning

The free market miracle that is U.S. domestic energy production keeps going as domestic oil production, particularly that generated by hydraulic fracturing shale, has produced a massive economic stimulus.

How much stimulus?  CNN/Money quotes Stephen Stanley, Chief Economist Amherst Pierpont as pinpointing it at $1 billion into consumer wallets for every penny that gas prices drop. The publication estimates based upon Stanley’s analysis that the drop in gasoline prices of $0.62 since December of 2013 equates to a $62 billion stimulus to the economy, and $500 more in the average households bank account.

But this is better than any government stimulus.  Unlike a tax cut, this free market supply and demand based stimulus doesn’t have any short-term negative impact on the budget deficit, and unlike a government stimulus spending bill it doesn’t blow up the budget.

A market driven drop in a core consumable allows businesses like manufacturers and transportation companies to divert resources away from this cost to other deferred items.

Individual consumers will have more money to spend to either keep their households afloat or to purchase new goods and services creating a virtuous cycle of growth, jobs and as labor demand pressures mount, increased wages.

To make matters even more rosy, AAA estimates that gas prices nationally will continue dropping, down below $2.50 a gallon on average nationally by Christmas.

Somewhat surprisingly, even with the collapsing prices for oil, U.S. production continues to accelerate and Saudi Arabia is promising to continue their current rate of oil production until American production subsides.

As the United States has become the number one oil producing nation in the world with Saudi Arabia second, these two factors insure that the current low oil price environment will not be short-lived, but should continue through the winter and into spring.

Worldwide this drop in energy costs is a naturally occurring shot in the arm at a time when Europe is in danger of slipping back into recession and China’s economy is foundering.

However, it is unreasonable to expect that the dramatic drop in oil prices will be sustained forever.  North Dakota Bakken shale oil is estimated to cost about $50 a barrel to bring out of the ground and deliver to market.  With current oil prices at just more than $63 a barrel, the price equilibrium tipping point where production will slow is rapidly being reached, and U.S. oil production will decelerate.  This is normal.

What is also normal is that with OPEC’s control over oil prices in the rear view mirror, the demand in the market will dictate price with suppliers increasing production when prices jump.

One major fly in the low oil price ointment is an Obama Administration plan to impose costly regulations on oil rail carriers as early as January, 2015, that will significantly drive up the cost of rail dependent Bakken oil to market.  This regulatory cost will increase pressure on domestic producers to slow production in higher cost wellheads likely ending the lower gasoline price party prematurely.

But even with the regulatory transportation burden, American’s will continue to enjoy the fracking bonanza at the pump for the foreseeable future.

A free market generated benefit disproportionately helping less wealthy families which spend a considerably higher percentage of their after-tax income on energy than anyone else.

Some might find the fact ironic that energy policies dictated by the free market would disproportionately help those who are most needy, when the left continues to engage in an unrelenting war on inexpensive, reliable energy.  The sad part is that the left’s campaign attacking America’s domestic energy resources is built around the premise of driving prices up so alternatives can be price competitive.

Liberal elites know that his hurts the poor, yet they have callously disregarded the impact.  Now, they face a booming private sector revolution that, if left unchecked, will relieve working families of that painful choice of whether to use their hard earned money to eat or put gasoline in their vehicle.

Adam Smith’s invisible hand can be a beautiful thing when it is allowed to reveal itself.

Rick Manning is the vice president of public policy and communications of Americans for Limited Government.

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