Energy / Trade

How to Win a Game of Chicken

OPEC’s refusal to cut crude oil production is like a declaration of war on the United States’ energy industry. Amidst falling oil prices, policymakers have largely stayed out of the fray, leaving U.S. shale oil producers locked in a price war while the public enjoys lower gas prices. However, with the price of oil hovering around $50 a barrel, it may be time for the U.S. to up their ante in this game of chicken.

While the shale oil boom has made the U.S. the largest producer of liquid fuels, shale oil producers are more sensitive to oil prices than traditional oil producers. The cost and productivity of wells in the U.S. vary immensely, but most U.S. producers break even at around $70 per barrel. Recent drops in oil price have already taken effect; according to the Economist, new drilling permits for the Bakken region in North Dakota have already declined by forty percent, and at current oil prices, investment in future projects could drop by more than half.

It is within U.S. interest to ensure that the energy industry survives, and policymakers need to consider the options available to safeguard the country’s energy security. A variety of policy options exist, but not all are as politically feasible as others.

The easiest policy is to do nothing and leave oil producers to fend for themselves. Exposure to international competition will incentivize U.S. producers to develop more efficient production methods. Fracking techniques are still being refined, and some shale producers already claim they can produce at $29 a barrel. Low oil prices could make the U.S. industry more affective and competitive in the long run.

Politically, this policy is the most plausible. Liberals don’t advocate support for oil, and conservatives often take a non-intervention stance. However, doing nothing runs the risk of turning the shale oil boom into a shale oil bubble. In the 1980s, U.S. oil producers briefly expanded to produce shale oil, but a 67 percent drop in oil price shut down the industry. It is difficult to determine at which point today’s producers could go under, but taking no action increases the risk of repeating what happened nearly thirty years ago.

Instead of passively watching the energy industry dry up, the U.S. could limit imports of foreign oil or provide tax subsidies to oil producers. These policies would help shale producers’ bottom line, but both are politically implausible. No politician would support limiting imports of oil, as it would raise the price of gas, and both the American public and the Obama Administration are strongly opposed to tax subsidies for “big oil.”

Lifting the ban on crude oil exports is a better policy that involves less government intervention. Because of an outdated law, U.S. oil producers are forced to sell their oil to domestic refineries that were made to process heavy crude. Since oil produced from shale is much lighter than conventional oil, the refinement process is less efficient, and U.S. refineries usually buy the shale oil at discounted prices.

Lifting the export ban would allow U.S. producers access to foreign markets and global prices. Oil exporters would also be able to compete with foreign producers and edge out competitors that operate with higher costs. Other benefits to lifting the ban include increased energy development and energy security, a smaller trade deficit and the ability to improve the U.S. geopolitical position.

Opponents of lifting the ban claim that allowing producers to export would raise the price of gas in the United States. However, a recent study by the GOA found that lifting the export ban would increase U.S. domestic oil prices and decrease consumer gas prices. Since U.S. crude would be refined more efficiently in international refineries, gas prices might actually decrease.

The question remains as to whether lifting the crude export ban is a political possibility. Many liberal groups oppose the expansion of the fossil fuel industry for environmental reasons. Select U.S. refineries are also benefitting immensely from domestic surpluses of light crude. However, lifting the ban is perhaps the most politically acceptable action to help the oil industry since it is not a direct intervention in the industry and it follows free market principles.

In today’s price war, policymakers should take necessary action to make sure U.S. energy producers are as competitive as possible. Lifting the crude oil export ban is a step in the right direction that makes economic sense. It may be the measure that ensures U.S. producers aren’t the first to yield in this game of chicken.