Thursday, March 14, 2013

Obama's Gusher

Hardly a day goes by without coming across more evidence of the significant impact that America’s energy boom is having on the economy. Today, it comes from a WSJ article on how America’s cornucopia of oil and gas is Firing Up a Stronger Dollar:

The Department of Energy expects net oil imports to account for just 32% of consumption next year, down from a peak of 60%—of a larger amount—in 2005. And whereas a decade ago, companies poured money into natural-gas import terminals, there is now a hot debate on exports—regarding merits, not feasibility.

One beneficial effect of this is a narrower trade deficit. The cost of net imports of petroleum had widened steadily through the past decade, breaching 3% of gross domestic product annualized at the oil market's peak. This bill is now down to 1.7% of GDP.

But this is only the first-round effect. Cheap U.S. natural gas, with the U.S. wholesale price of about $3.70 per million British thermal units about a third of European prices and a fifth of those paid in Asia, forms the basis for an increase in exports of manufactured goods such as petrochemicals.

Altogether, Citi estimates reduced energy-import dependence and cheaper gas could squeeze the current-account deficit by 2.4 percentage points of GDP by 2020. All else equal, that would take 2012's deficit of 3.6% down to 1.2%, which would be the lowest since 1997.

The moderating effect of greater supply on energy prices is another important benefit to the economy. While it might not seem apparent yet, rising U.S. oil supply serves to cap global prices. Even if the Organization of the Petroleum Exporting Countries cuts its own output to support prices, the resulting spare capacity caps increases.

Meanwhile, BofA Merrill Lynch estimates the U.S. paid just $76 billion for its natural gas in 2012, a full $140 billion less than in 2008—a saving bigger than the payroll-tax cuts of 2011. And unlike the latter, this benefit looks set to stay for a while.

None but the most Panglossian progressive would pretend that the US economy is not still struggling to recover from the 2008 recession. Growth is anemic, we haven’t come close to replacing the number of jobs lost, and consumer confidence is fickle and unsteady. Can you imagine how much worse off we would be without the benefits brought about by the energy boom?

Therein lays one of the great ironies of President Obama’s tenure. The one undisputedly significant and positive contributor to economic growth during his administration is not only one that he has almost nothing to do with, but one that he actually came into office campaigning against (remember the mockery of “drill, baby drill”?). Lest there be any doubt as to the accuracy of the claim that President Obama has not contributed to the oil and gas boom consider this:

President Obama does a neat John D. Rockefeller imitation these days, taking credit for soaring domestic oil and gas production as if he planned it that way. Not quite. As a new Congressional Research Service (CRS) reports shows, "All of the increased [oil] production from 2007 to 2012 took place on non-federal lands."

The research outfit reports that thanks to the innovation of hydraulic fracturing and horizontal drilling on private and state lands, the U.S. in fiscal 2012 produced 6.2 million barrels of oil daily, up from 5.1 million barrels as recently as fiscal 2007. Private industry's technological advances, operating under state regulation, increased U.S. production last year at the fastest rate in the history of the domestic industry, which drilled its first commercial well in 1859.

The story on federal lands is the opposite. The CRS study finds that federal oil production fell more than 23% from fiscal 2010 to fiscal 2012 and is today below what it was in 2007. The federal share of total U.S. oil production has slid under Mr. Obama to 26% in fiscal 2012 from 31% in fiscal 2008.

The story is the same in natural gas, with overall production climbing 20% since fiscal 2007 even as "production on federal lands has remained static or declined each year over the same period." Production on non-federal lands grew 40% since 2007, while production on federal lands fell by a hard-to-believe 33%. The federal share of total natural gas production in 2007 was 27.8%. Today it's 15.5%.

This sharp drop in production on federal lands is the direct result of Obama Administration policies. They include the drilling moratorium imposed after the 2010 Deepwater Horizon spill, followed by a limit on new drilling permits—the notorious "permitorium."

History may show that in some ways President Obama was one of the most fortuitous men to every sit in the Oval Office. Because when it comes to the US energy boom-and its beneficial impacts on the economy-he has struck it rich without even trying.