The New Economics Of Oil
Via Brad Plumer comes a Citigroup research note arguing that the Peak Oil thesis is dying right now in North Dakota where shale oil production is surging.
I’m not sure I buy that, but it’s unambiguously true that the short-term supply situation now looks different than what we’ve come to expect in recent years. Recall that for a while we had the OPEC paradigm under which Saudi Arabia had oil that was cheap to extract but that it would hold off the market in order to boost the price.
Then if global supply was disrupted or demand surged, Saudi Arabia had the ability to open the spigots and prevent the price of gasoline from spiking. Alternatively, OPEC could deliberately throttle supply and push prices up. But in recent years that excess supply evaporated, creating a situation where global growth led naturally to big increases in gasoline prices. That has, of course, macroeconomic consequences. In particular, insofar as oil exporters like to recycle their earnings into U.S. Treasuries even at a time when the U.S. was operating under a zero interest rate policy, it served as a kind of passive monetary contraction. Demand for dollars and dollar equivalents would surge without an offsetting policy response from the United States.
But thanks to the shale oil there are now some new factors in play. One is that a rise in demand for oil stimulates investment in domestic U.S. production and related activities. The other is that various factors have turned the United States into a net exporter of refined petroleum products even as we remain a large net importer of crude oil. That means that the precise structure of the difference between the price of gasoline (and jet fuel, etc.) and the price of oil is now relevant in a way that hasn’t normally been the case. The price of crude oil is obviously related to the price of gasoline, but they’re not identical, and now that America imports the raw product but exports the finished product, the spread and not just the headline prices are relevant to our balance of payments.