Last week Weatherford International PLC, one of the four largest oil-field service companies in the world, filed for bankruptcy. Founded in Texas back in the 1940s, the now Swiss-owned oil-field giant is according to the Wall Street Journal one of nearly 180 service companies that have filed for bankruptcy since 2015. It turns out there’s a great deal more drilling activity stateside when the price of a barrel of oil is over $100, versus roughly $56 today.
The stock markets have reflected this correction in the oil price. According to Clifford Krauss of the New York Times, this time six years ago the “value of oil and gas stocks as a proportion of the S&P 500” was 8.7 percent versus 4.6 percent today.
Krauss claims “a global glut” is driving down oil prices, and bringing on difficulties for the U.S. energy industry. The lefty in Krauss plainly doesn’t know it, but he’s joined conservatives who’ve said much the same: fracking innovations in the oil patch have been the enemy of fracking in the oil patch! Conservatives who used to wisely talk up the genius of abundance, and who used to wisely point out that the rich get rich by virtue of pushing down the prices of everything (think Rockefeller, think Ford, think Bezos and the late Steve Jobs), want us to believe that with oil it’s different.
To believe the dominant conservative narrative, fracking and oil itself are sui generis, that the allegedly low oil prices fracking is said to have unearthed have proven the enemy of fracking. Sorry, but this belies basic common sense.
For one, it’s worth pointing out that at $56/barrel, oil is trading at over five times what a barrel could fetch in 1998. Back then a gallon of gasoline could easily be had for under $1, and this was true even in high tax states like California. So when Krauss writes of gluts, and conservatives do the same, one wonders what they’re talking about.
The frequent reply to the above is that the world economy’s growth outpaced oil production, but it’s not as though global growth in the ‘80s and ‘90s wasn’t substantial amid economic liberalization that was taking place around the world. Furthermore, it’s not as though the global economy was booming in the years after 2008, yet the price of oil stayed above $100 right up until the fall of 2014.
Furthermore, the “we’ve been so innovative that we’ve put ourselves into the poor house” narrative ignores how capitalism works. While it’s perhaps the norm for the lefties at the greatest newspaper in the world (the New York Times) to misunderstand the genius of capitalism, it’s not the norm for conservatives. Yet oil brings out the silly in conservatives.
Again, they want us to believe that frackers put frackers out of business by driving down the price of oil to a level that’s once again over five times what it was a little over twenty years ago. Something’s wrong with this analysis. Lest conservatives forget, capitalists are routinely rewarded for driving down the price of everything, and at present billionaire-dense Silicon Valley is experiencing a substantial investment inflow precisely because the great minds in the region are working feverishly to make life exponentially more affordable.
Yet in the oil patch $56 oil is the stuff of rampant bankruptcy? And an investment outflow? What’s the riddle here? The answer to the riddle is simple, but also crucial.
Specifically, oil never became scarce in the 21st century as much as the dollar in which oil is priced shrank a great deal in value. Much as a 5 foot tall individual would soon be 25 feet if the length of a foot were reduced to 1/5th of a foot, the price of oil has spiked in modern times to reflect a dollar that is not the same as the one that was circulated when the 21st century began.
Importantly, commodity prices frequently adjust more quickly than other prices do. This is relevant to the discussion when it’s remembered that the U.S. energy industry was (per Frackers author Gregory Zuckerman) largely non-existent in the 1980s and 1990s. Well, of course it was mostly non-existent. If $56 oil is not enough to keep domestic exploration afloat, readers can surely imagine how much smaller the industry was in the 20th century’s concluding decades.
The shame is that money illusion in the 21st unearthed a lot of investment and loans meant to revitalize that which had been dormant in the States. All in pursuit of high oil prices that were only high insofar as the dollar was cheap. Indeed, innovative as fracking techniques surely are, the unspoken truth is that fracking is only economic (at least for now) insofar as the price of oil is artificially high. Translated, all of us must earn weak dollars that are growing soggier by the day for the U.S. oil industry to thrive. It’s not a very good compromise.
Importantly, none of what’s been said should be read as a rant against oil and its by-products. While logic dictates that brilliant minds will eventually happen on oil’s replacement, for now oil is an essential driver of economic progress.
What’s not essential is that “America” be a big player in the extraction of what is globally plentiful. The U.S. plainly wasn’t a player in the ‘80s and ‘90s, but the fact that it wasn’t speaks to the genius of free trade: it’s as though everything is being produced next door. Sorry conservatives, but the genius of comparative advantage is not negated by oil. It’s a market good like any other.
Better yet, the genius of capitalism whereby entrepreneurs turn scarcity into abundance similarly isn’t negated by oil. That energy extraction stateside can’t survive low prices is all the evidence we need that the industry is far too large in its present form to begin with. If more people followed the dollar, more would understand why this is true.