Say what you want about gold, the almighty U.S. dollar, or bitcoin, for nearly 50 years the world’s default currency has been oil. Business activity would rise or fall based on the price of oil and less so on interest rates like today. This was the lesson of the two oil crises in the 1970s. Critics called the 1991 Gulf War and 2003 Iraq War “wars for oil,” but they did, in the end, bring price stability, which encouraged prosperity.
That’s what is broken today.
Oil has suddenly become bitcoin.
The Shale Kingdom
The shale boom busted the oil market. The U.S. is now, for the first time in 75 years, a net exporter of oil. That’s right, for the week ending Nov. 30, the U.S. exported 211,000 more barrels of oil than we imported.
Not everything in the energy market has been trending down. Natural gas prices are up 27% this year and are currently trading at about $4.53 per Mcf. The “gas glut” that began early this decade with the opening of the Appalachian Marcellus Shale to fracking operations has finally broken.
That means the U.S. economy is getting no lift from rising oil prices, because we’re paying higher natural gas prices. What’s good news for your car is bad news for your house.
The Real Threat
The real threat, however, doesn’t lie in where oil and gas prices are, but in their lack of stability.
If what you’re using for currency is subject to wild swings in price, world economies also become unstable. Not only has oil become volatile, but so have markets within the oil sector. India, for instance, is now paying over $60 per barrel for the stuff. Western Canada Select, meanwhile, the shale oil coming out of Alberta, was fetching just $26.50 per barrel.
It’s very hard to plan in such an environment if you’re a manufacturer or even a consumer.
While we’ve become accustomed to oil rising and falling on the whims of Sheikhs or the actions of terrorists, prices are now completely out of control, as huge new pools are found in places like New Mexico’s Delaware Basin.
Regulating the Oil Market
Back when I was a kid, in the 1960s, the part of OPEC was played by the Texas Railroad Commission, which told producers how much of their oil they could bring to market at any one time, in order to maintain price stability. Price stability benefitted both producers and buyers.
That’s what is lacking now. Oil prices surged on Dec. 7 as OPEC agreed to cut production and sought Russian cooperation. This reversed a decision to increase production taken in June, as Venezuela went offline and Libya threatened to do so.
The Administration insists OPEC is “ripping off the rest of the world,” but it seems more interested in price stability — high enough to slow the move to renewables, not so high people can’t make money. It’s the U.S. that is out of control, finding giant new pools and with “dead men drilling” like Sanchez Energy (NYSE:SN), fighting to pay off production loans taken out when times were better.
Where’s the Texas Railroad Commission when you need them?
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.