Bring on Higher Oil Prices: They’ll Boost the US Economy. Powell Sees it Too. A New Experience for the US

Here’s why.

Powered by the iffy situation in the Persian Gulf, the Strait of Hormuz, and the Gulf of Oman, with attacks on tankers and now the downing of a US drone, the price of crude oil got a little nervous in recent days. WTI jumped about 6% today to over $57 a barrel.

But this was just a minor uptick in the overall scheme of things: The US, which has become the largest oil producer in the world, is in the middle of its second oil bust in five years:

These two oil busts are largely a consequence of surging US crude oil production. During the oil bust of 2014-2016, the price of WTI collapsed by over 75%, careening from $107 per barrel to a low of $27 per barrel in 18 months, before starting to rebound. In the process, a slew of oil-and-gas drillers filed for bankruptcy.

For a while it looked like the shale boom, where all the growth in production had come from, was running out of money, and therefore out of fuel. Production fell sharply from early 2015 through much of 2016, but then new money from Wall Street appeared, and production began to soar again, hitting new records all along the way.

Shale wells produce a variety of liquid hydrocarbons (they also produce gaseous hydrocarbons which are not included here). This production of crude oil and petroleum products soared from just over 7 million barrels per day (bpd) in 2010 to 16.6 million bpd currently, according to EIA data:

This surge in production comes even as shale oil-and-gas drillers have essentially been cash-flow negative in their entire history, drilling more and more of their investors’ funds forever into the ground. But so far so good — as long as it’s not my  money.

The US used to be the largest net importer of crude oil and petroleum products in the world. Between 2005 and 2008, “net imports” (imports minus exports) of crude oil and petroleum products exceeded 12 million bpd. But surging production in the US has slashed imports. And recently exports have surged, and the trade in crude oil and petroleum products is now nearly balanced between the US and the rest of the world. And the net imports are heading toward zero – the point where the US imports as much as it exports.

In February, net imports were down to just 176,000 barrels a day, the lowest in the EIA data going back to 1971. In March, the most recent data available, net imports were 842,000 barrels a day:

The fact that the US imports a lot of crude oil and petroleum products, even as it exports a lot too, is related to a variety of factors and market conditions.

For example, California is the fourth largest oil producing state in the US, but it’s not enough. It’s not connected via pipelines to producing regions east of the Rocky Mountains. So it gets some oil by oil train. It imports oil from Alaska. And it imports the rest from other countries.

But California’s refineries also export gasoline to Mexico and other countries – try to explain this to Californians who groan under high gasoline prices! This mismatch of supply and demand, lacking infrastructure, and global factors plays out across the US and leads to a mix of imports and exports.

The US has become a huge oil producer despite the cash-burning characteristics of the shale oil business. But the very fact that the shale oil business burns so much cash makes it a large contributor to the US economy as every dollar that gets “burned” is actually spent in the US and gets recycled in the US economy.

The jobs are well paid. The business has a large high-tech component, involving highly paid technology employees and contractors, along with expensive specialized tech equipment and software. In addition, it involves sophisticated heavy equipment in the field that is fabricated in factories around the US. It involves transportation to get this equipment and supplies to the oil field. It involves the construction of infrastructure, such as pipelines and oil storage facilities, processing facilities, and the like.

Oil-and-gas related industries and their suppliers weigh heavily in US industrial production and manufacturing, but also in services such as engineering.

Back when the US was the largest net-importer of crude oil in the world, any increase in the price of oil siphoned most of this money out of the US economy to oil-producing countries. As consumers and businesses had to shift spending dollars from US products to products based on imported oil, a big surge in oil prices – the “oil shock” – could trigger a recession.

This picture has now completely changed. And Fed Chair Jerome Powell made note of it during the post-meeting press conference on Wednesday.

While there are some strengths in the US economy, such as services and consumer spending, he said, there are also some weak spots, particularly business investment and manufacturing production. He listed a number of factors, including “lower oil prices.” They not only contribute to “lower investment,” but also to lower manufacturing production as purchases of new equipment are put on hold.

This is already showing up. The plunge in oil prices since August has caused the oil-and-gas sector to get skittish with capital expenditures this year, and Powell picked up on that. Investment in the US shale sector has a big impact on the real economy.

This became apparent during the 2014-16 oil bust when the sector drastically cut back on investing. The overall economy started to slow in 2015, and in 2016, GDP growth was just 1.6%, the worst since the Great Recession. When the shale patch recovered, economic growth accelerated.

A higher oil price, say over $75 a barrel, would unleash investment in the US oil patch, and it would unleash orders for new equipment and services. When companies invest in US shale oil, it triggers a whole chain of activities in the real economy.

Then Powell touched upon the other side of the coin of lower oil prices: Consumers pay less for gasoline. Conversely, they would pay more for gasoline when oil prices are higher. Consumers hate paying more for gasoline. But here is the thing:

Whatever amount consumers spend on gasoline is part of “Consumer Spending” which accounts for about 70% of GDP. So, when gasoline prices rise, consumers with limited budgets shift some of their spending from Walmart’s imported doodads to gasoline. In this scenario, gasoline sales would rise a lot and Walmart doodad sales would fall some, and it would all flow into “consumer spending.”

But gasoline in the US is now mostly a made-in-the-USA product (see the trade data above, third chart), and most of the money spent on gasoline goes into the US economy, and stays in the US economy, and is not siphoned out by OPEC or other producing countries.

Imported doodads siphon money out of the US economy (imports are a negative value in the GDP formula). So every dollar a consumer shifts away from imported doodads to gasoline ends up boosting the overall US economy – though it might slow China’s economy a tad.

Obviously, there are dark consequences of higher gasoline prices: For example, they may also shift dollars from things like food and healthcare to gasoline. Higher gasoline prices make consumers surly, and squeeze spending on discretionary things, such as movies or restaurant meals. But they’re all shifts within “consumer spending.”

If the price of WTI goes back to $75 or $80, there will be a flood of new investment in the oil patch in the US. This spending would flow into manufacturing and services. It would flow into wages. It would flow into trucking and tech. It would ricochet around the US through the multiplier effect. Now that the US is the largest oil and natural gas producer in the world, higher prices for these products are actually beneficial to the overall US economy, just like they are beneficial to OPEC. This is a new experience for the US.

For six months now, folks said the Fed had made a “U-turn” and would cut rates at the “next” meeting, etc. But none of it happened — and might not happen. Here’s why, in Powell’s words. ReadWhat Powell Really Said about the Economy and What Would Trigger a Rate Cut

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  155 comments for “Bring on Higher Oil Prices: They’ll Boost the US Economy. Powell Sees it Too. A New Experience for the US

  1. Sporkfed
    Jun 20, 2019 at 9:36 pm

    What about hurting SUV and truck sales ?
    Wouldn’t high fuel prices increase sales for smaller imported vehicles overall at the expense of larger American made vehicles ?
    Higher fuel prices would also hurt outer suburban housing and add a premium to
    housing closer to work and amenities.

    • Jun 20, 2019 at 9:45 pm

      Sporkfed,

      “Wouldn’t high fuel prices increase sales for smaller imported vehicles overall at the expense of larger American made vehicles?”

      You mean increase sales of EVs? As in battery-electric SUVs and pickups? Every automaker is getting ready for this moment. I’m not sure SUV and pickup owners will trade in their vehicles for a small car. I just have trouble seeing that. But they might trade it in for an EV version of what they have now.

      • Art V
        Jun 20, 2019 at 10:32 pm

        Size is a hedonistic improvement. We all love higher ceilings and more leg room.

      • OSP
        Jun 20, 2019 at 11:08 pm

        and a significant amount (possibly a majority?) of these smaller vehicles are built in the US now.

        • char
          Jun 21, 2019 at 8:28 pm

          Assembled in the US. More parts are imported and R&D is done more in their home markets.of those cars

      • DR DOOM
        Jun 20, 2019 at 11:35 pm

        Sounds like a case study in Mal-investment that Mises of the Austrian school of economics would consider if he was not a dead old white guy. How about Wall Street providing all me and all my hillbilly buddies with fully loaded F-350 trucks and fuel under a lease structure and sell derivatives on miles driven. And are you sure that it will not be your money or mine in the end? One thing for sure in the economic reality show that I live in there will be nothing but stems and seeds left when Wall Street directed economic engineering reaches me .

        • Manofred
          Jun 22, 2019 at 11:34 am

          ” . . there will be nothing but stems and seeds left when Wall Street . . .”

          That really dates you. Enjoy the hi-tech; switch to ‘sinsemilla’.

      • Realist
        Jun 21, 2019 at 4:40 am

        In certain markets in Europe, Renault does sell the EVs, but lease the battery to the buyer of an EV, thus reducing sticker price of EVs

    • alex in San Jose AKA Digital Detroit
      Jun 20, 2019 at 11:42 pm

      Sporkfed – you talk like those are bad things.

      Really, I’d like to see gasoline and diesel cost $25 a gallon

      I’d like to see a very rigorous test to be able to operate a motor vehicle (with the exception of mopeds 50cc and less) and you have to wear white gloves too, just like in 1970s/1980s China. That’s be about right.

    • JoAnn Leichliter
      Jun 21, 2019 at 6:14 am

      They also make independent contractors who deliver things very, very surly.

  2. Gershon
    Jun 20, 2019 at 9:40 pm

    Tapped-out debt donkeys paying $100 to fill up the gas tanks of their SUVs and full size pick-ups won’t be doing much non-essential consuming. This is going to be the tipping point for people who are already living paycheck to paycheck and maxing out their credit cards to pay for groceries.

    Meanwhile, gold just hit a five-year high of $1407 an oz as the flight to safe haven, and out of the Fed’s rigged Ponzi markets, gathers force.

    • alex in San Jose AKA Digital Detroit
      Jun 20, 2019 at 11:45 pm

      Out riding my bike around, I can’t believe how, in this economy, so many people still have cars. In the 1930s, people would forgo milk for the baby and pull their own teeth rather than give up their cars, so maybe this is the same.

      • NickL
        Jun 21, 2019 at 6:15 pm

        You should come to the NYC or Boston areas. Both areas have good public transport but so many fresh faced 20 somethings driving late model BMWs, Acura and new top of the line Jeep SUVS. In both metro areas housing costs either mortgage + property tax payment or rent now exceeds $2500 a month for most people. And insurance in the NYC Area another $200 a month.
        In the Boston area there is yearly excise tax on vehicles as well.

    • Herman-munster
      Jun 21, 2019 at 12:05 am

      EXACTLY!

      Remember $147 Oil? That didn’t work out so well.

      • Jun 21, 2019 at 12:12 am

        Herman-munster,

        Check chart #2: that $147 oil occurred when the US had net imports of crude and petroleum products of 12 million bpd. Now net imports are near-zero. See the difference? THIS is precisely why I wrote the article. You totally missed the point.

        • JZ
          Jun 21, 2019 at 10:05 am

          We can all speculate on what high oil price will do to the entire economy but why “Powell sees it too?”. If I have 5 infinity stones,
          I will wipe out the entire (NOT half) of the world central banks and send Powell to drive a Uber.

        • JZ
          Jun 21, 2019 at 10:17 am

          And then see what Powell is going to say about oil prices.

      • Frederick
        Jun 21, 2019 at 1:03 am

        I took my car off the road when gas went over 5 bucks a gallon in 2008 The local bus fare at 2 dollars was very attractive to me suddenly Funny how that happens I think prices at that level today would crush the US economy except the fracking firms and big oil of course

    • Gold is just..gold
      Jun 21, 2019 at 4:17 am

      Yes. But remember, “Gold is just…gold…”

      • sunny129
        Jun 21, 2019 at 4:32 pm

        GOLD is a NOT a religion but just a TRADE for me, both going up and down, using options, beside a very small portion with ETFs of gold/gold miners!

        With CBers including Fed having proclaimed that LOW rates including NIRP are on the way, in the near future, GLD shot up nearly 50$ per ounce.

        Nearly 13 Trillions are already in the NIRP zone and probably, more to join!

        It is the expectation or fear of the dreadfulness of the potential actions of CBers, makes the GLD an attractive for commodity trading!

        OIL is also the same with more volatility with geopolitical events, whispers and of course, tweets from Trump at any time!

    • Jun 21, 2019 at 12:05 pm

      Trump’s prized rigged pigshit ponzi fraud three ring circus sideshow know as the U.S. stock market.

      • Setarcos
        Jun 21, 2019 at 7:06 pm

        That is quite a turn of a phrase, which actually has been applicable to the stock market since pigshit was a real feature, frequently scraped from shoe leather.

        There is nothing new under the sun.

  3. njbr
    Jun 20, 2019 at 9:44 pm

    The new shale oil fields have a very light grade of oil (WTL) that cannot be processed readily in current refineries and is selling at a discount to WTI, which is already sold at a steep discount to Brent. As these fields produce more, and more refiners refuse it, or it has to be shipped further away, the price will fall more for the shale oil.

    An industry 20 years ahead of it’s time–a last gasp option being burned out at no profit long before conventional sources have run dry.

    • JSM976
      Jun 20, 2019 at 11:40 pm

      That pretty much sums it up. And it’s being burned out faster than we are being told.

    • The Third Coming
      Jun 21, 2019 at 12:05 am

      Yep – and that’s why diesel is being discouraged.

    • MC01
      Jun 21, 2019 at 12:58 pm

      While some time has passed since I studied this stuff at the Uni, once in a while I like to read something to keep me up to date on the matter.

      I’ll keep it simple because the last thing I want is to give a (free ;-)) lecture but the problems of refining shale oils are very different from those one usually read in the media.
      The biggest problem is the high paraffinic content. Shale oil regardless of origin is full of waxes with a high melting point (often over 70°C) that can cause a ton of problem to storage tanks and process units by clogging passages.
      The second big issue is that when shale oil is mixed with heavy asphaltenic crude the blend can experience a phenomenon caused asphaltene instability. I will spare you the sordid details but the end results is a sludge that will reduce storage capacity and foul equipment and reduce the efficiency of the desalter unit. What is a desalter unit? It’s a vital piece of equipment that will remove salts (in the specific sodium, calcium and magnesium chloride) from the crude blend before refining can start otherwise very bad things will happen.
      After skimming over delightfully technical stuff that probably still has chemistry and engineering students cursing at their textbooks just like in my time we get to another big issue, and that’s the wide variation in composition. Shale oil is not merely very variable among fields: it’s highly variable even inside the same field.

      Shale oil is old technology in itself: after all before the discovery of large oilfields in the Middle East it was in shale oil exploitation and refining that the big money was concentrating and the reason China is so advanced when it comes to shale oil is not just because of recent investments but because China has been extracting and processing shale oil on large scale since the 1920’s. I think the original technology came from Japan but my memory is not what it used to be and the Chinese quickly became very proficient at it anyway.

      • Erle
        Jun 21, 2019 at 10:34 pm

        MC01. you keep putting up truly informative posts.
        Is there a lot of ethane and propane coming out of the gas wells? NG was banging around 2.20 today and may have closed at that. NG has done a dumpster dive in the past two months or so, nut what about higher molecular numbered aliphatics?
        Older cars can be fairly easily converted to propane/butane fuels.
        The paraffins can be sold as a building coating for waterproofing and a barrier to graffiti spray can artistes

        • MC01
          Jun 21, 2019 at 11:44 pm

          Propane, ethane and butane are byproducts of natural gas extraction and to a slightly lesser extent petroleum cracking.
          In the first case they need to be removed from the raw natural gas to avoid condensation in the pipelines, in the second case these products are either stored or burned.
          Propane, butane and ethane are often sold in a mixture as LPG (Liquified Petroleum Gas). As byproducts of other industrial processes, LPG and its components have a big problem: supply is notoriously unelastic, meaning it struggles to adapt ot growing demand.
          This is the reason why LPG goes through very typical boom and burst cycles: as soon as the price drops it become popular but given supply struggles to meet increased demand, price tends to go up far faster than with other fossil fuels. When this happens, demand collapse.
          Rinse and repeat.

      • Bart
        Jun 22, 2019 at 6:28 am

        MC01,

        So net net, the oil produced by fracking in the US does not turn into gas used in cars in the US?

        Gas and Diesel for cars, SUVs and trucks in the US – where does the oil to produce this fuel come from?

        If the fuel used in the US for cars and trucks comes from oil sourced outside the US, should there be some type of conflict in the ME, what does that mean for gas and diesel prices in the US?

        • Jun 22, 2019 at 10:28 am

          There are refineries in the US, (Cal for instance) though we outsource a great deal. Since the US pumps more oil that it uses it’s not a problem. Most urban transportation has segwayed to CNG. There is a lot more CNG than anyone imagines, the stations are not public.

  4. Jaymo
    Jun 20, 2019 at 9:51 pm

    How much investment can really be expected in shale oil given the painful boom and bust experience of the past. Are producers going to be willing to invest in capital equipment with a potential 20 year lifespan in such a volatile market? And can shale be profitable in the long term even with oil in the $70 range?

    • Art V
      Jun 20, 2019 at 10:38 pm

      With 0% real rates, and nominal rates below 2%, a 20 year lifespan scares no one (one of the reasons “growth” has outperformed “value”).

      Expect endless liquidity and continuous suppression of volatility in all asset classes as long as rates stay this low.

    • MC01
      Jun 21, 2019 at 1:34 am

      The profitability of shale is a geographic and geological question: some oilfields are cheaper to work on than others and even inside the same oilfield differences can be huge. For example the Permian Basin presently has breakeven costs ranging $48 to just $21 per barrel.

      Fracking costs have come tumbling down over the past decade, not just because of new and more efficient equipment and lower debt servicing costs, but because the technology is better understood with every passing year. Factors such as the quantity and quality of proppant (What am I a chemist or a geologist?) are now taken into account seriously, as seen by the massive use of resin coated sands. In turn if, say, your outfit uses sintered bauxite as part of your proppant mixture you have to keep your eyes like a hawk on the price of bauxite. It’s far more complex and in some way fascinating than it was a decade ago.

      Technically speaking fracking is not incompatible with oil prices around $70, but… a company like Chevron, with ready access to capital to burn if the need be, extremely low debt servicing costs and generally low breakeven costs (Chevron concessions around the Permian Basin all have under $30 breakeven) will have no problems and most likely may even profit from fracking long term. But for every Chevron there are half a dozen outfits buckling under the weight of debts they can hardly afford even at present rates and/or working on concessions with high breakeven costs. For these shaky outfits even a six-month slump in the price of oil can be devastating: perhaps they can survive the immediate financial hit, but at the cost of reduced investments in exploration, production, data analysis… death by firing squad right now or by starvation down the road.

      • Jack
        Jun 21, 2019 at 5:44 am

        Break even prices of $(21-48)!!!!

        I am on the floor couldn’t control my laugh.

        Listen !

        Shale oil will have a semblance to breaking even only when the price of oil is trading at over $100 No less.

        and please don’t get carried away too much with Chevron’s balance sheet, as they’d rather get Cheap accessible oil around the globe to be bothered to get entangled with the ( Multitude , and never ending law suits down the road with the great litigious American system)

        Trust me a lot of long term oil players are well aware of the BP DRAMA that nearly brought the company to heal .

        Note: I am Not belittling the disaster caused by BP’s conduct as the investigations showed at the time.

        So remember if you’re a Temporary oil company then okay you can invest in shale oil Now, you could lose all your investor’s money if you choose your location or jurisdiction recklessly , but you can always pollute the Food and water sources and make profits and runaway as far as possible and leave the taxpayers to foot the bill and call yourself smart business.

        As for the premise of this article that higher oil prices could be beneficial to the US economy!

        The answer is NO.

        Energy is a vital part of any developed country, and the US is No exception, whenever oil prices go up it will have a Net adverse effect on the health of the economy.

        It doesn’t matter how you flip it .

        And until the Renewables catch up to the efficiency part of the equation, and Nuclear is looked at with continued suspicion and fear, then we’re left with what we’ve got , and that is hydrocarbon Oil, Coal etc.

        This would be the first time I disagree with Wolf!

        But nevertheless great article and excellent research, cheers !

        Note 2!

        One of the saddest episodes of the shale business is the powerlessness that states in the Permian basin and North Dakota finds themselves in , in regards to forcing these companies to heed and comply with the regulations requiring the (Frackers) to reduce the amount of Gas burns is Not astounding only but TELLING!

        The heavy reliance of these states on taxes on those type of destructive companies only embolden these type of corporate culture to continue screwing the legislative assemblies and their citizens by extension!!!

        • drg1234
          Jun 22, 2019 at 11:43 am

          Honestly, you don’t sound like you know what you’re talking about.

    • Have hands will travel
      Jun 21, 2019 at 6:58 pm

      Several years have passed, but when I was in the Bakken, there were $85/bbl extraction counties, and $28 sweet spots. With cash lavishly thrown at drillers, prospective leases were surveyed, the reservoir imaged & dimensioned, later competitively contracted, drilled, fracked, and Most often Capped, depending on a vast calculus obviously. Most all the landowners could sit on the asset. Many have 4 + (at cost ten million$ each @2014-15 $$). The recent
      fifty-three or even $60 won’t be widely compelling…but for many it is.

    • char
      Jun 21, 2019 at 9:06 pm

      Will oil still be used in 20 years? If i look at the war on plastic and the electrification of the car than i expect oil only to be used for air transport and legacy usage. Not an exactly giant market

  5. raxadian
    Jun 20, 2019 at 10:36 pm

    Want highter oil prices? Stop trying to make people do economic suicide with shale oil.

  6. Rowen
    Jun 20, 2019 at 10:44 pm

    So trickle down economics funded by a private tax on oil?

    got it.

  7. Paulo
    Jun 20, 2019 at 10:50 pm

    An industry that loses more and more money every year will be good for the economy, because higher prices will attract more investment and more dollars spent. Huh? Shale? How come this doesn’t work for retail malls and commercial RE? Uber? Beyond meat? Car rentals?

    Build it and they will come? Isn’t this argument about Shale goosing the economy the same meme as providing helicopter money to individuals? Isn’t it the same as China’s ghost cities? How about a bridge to Nowhere Alaska?

    • LouisDeLaSmart
      Jun 20, 2019 at 11:41 pm

      \\\
      Shale oil is rendering entire regions useless due to soil and water pollution. Other industries have done so too, but shale destroys underwater aquifers and wells, whereas the industry and agriculture poison the surface waters and poisons the underground waters in a limited way. In other words, when the shale and fracking bonanza is over, who will pay for the cleanup? The same people who made the profit? I am not an expert in this field but for every one dollar invested into this industry, one will need 10 to fix the damage done…talking about cost.
      \\\
      When the time comes, and all water sources in the USA are privatized, suddenly you will have a surge of information about drinking water quality in the mass media.
      \\\

      • RD Blakeslee
        Jun 21, 2019 at 8:16 am

        “… I am not an expert in this field …”

        Well said.

        The “factual” assertions are Neo-religeous, “green” fanaticism.

        • LouisDeLaSmart
          Jun 21, 2019 at 2:01 pm

          \\\
          Nope, not neo-religious, or fanatic. Just a concerned reader. But, yes, I admit not being an expert. And yes, a clean-up will be necessary in the future.
          \\\

        • njbr
          Jun 21, 2019 at 6:26 pm

          Fracking uses 1% of industrial water usage in US.

          Aha, not much, you say.

          But that water is extracted from areas like ND, CO, TX, OK, NM–places not exactly over-flowing with water. It’s from all very slow recharge fossil water-table water, and, much of the time pumped back into the fracked ground contaminated all sorts of secret sauces.

          Yum!

          PS, ever heard of the fracking recharge earthquakes in OK ?

        • Erle
          Jun 21, 2019 at 10:46 pm

          I live across the street from Lake Michigan so I do not worry. Besides it rains every day here and it never goes above 65 so I refuse to worry. I can fill five barrels of water each day if I run a downspout to the barrels.
          On the solstice it didn’t make it to 58 F.

      • Have hands will travel
        Jun 21, 2019 at 7:12 pm

        With all due respect, this is erroneous in my experience. The deepest domestic source US acquifer in frack zones, IIRC apprx 2400 ft.
        Each well is concrete-cased down 4000 ft. The downhole is 100% encased in this live-on-site continuous pour.

        Cross-contamination is not a thing in the Bakken. ND residents value H2O for their families, husbandry, and did I mention vast crop output?

        • Jack
          Jun 22, 2019 at 4:01 am

          With all due respect, go and study a bit more geology!

          The planet you live on is a dynamic piece of art work and earth’s crust moves albeit slowly,

          Fracking however is turning large tracts of the Permian basin and ND state to liquified sands that have to be ( Re -Adjusted)!

          You know your good old tremor just to balance things up.

          So, the idea that’s been sold to you does have caveat emptor !

          You’ve got to remember that the salesman will never tell you that his/ her product is deficient or lacking!

          So all the assurances that come with this ( Fracking Technology)! Can be as good as the worthless papers that they’re written on!

          But by all means go ahead and invest and buy these companies.

          The damage to water resources will make you refugees in Good old Mexico! If they don’t build their wall fast enough:

  8. Michael Engel
    Jun 20, 2019 at 11:13 pm

    Ton of oil from Liang to Vietnam, that’s why Iran spanked Japan.

  9. GP
    Jun 20, 2019 at 11:36 pm

    Higher oil prices would look good as aggregate on a spreadsheet, but won’t be pretty on disposable incomes of families.

    Mishmash of routes look weird, but perfectly rational. For example, it might be cheaper to ship to Mexico from California than to surface-transport it within the state.

    • Nicko2
      Jun 21, 2019 at 4:17 am

      There is no excuse for most Americans not to convert to a BEV.

      • GP
        Jun 21, 2019 at 1:01 pm

        Well, cost would be the primary motivation. I can buy a decent used ICE car for about ten thousand $$.

        Pretending BEV is the solution is stretching truth. There are no good solutions yet for disposal of used EV batteries at scale.

        Mining for rare earth metals causes own set of issues: https://www.theguardian.com/environment/2012/aug/07/china-rare-earth-village-pollution

      • Erle
        Jun 21, 2019 at 10:54 pm

        The coal fired EV providers are just north of me. I was impressed with the plumes from them because of it being so cold here.
        As for me living on the wrong side of the railroad tracks I salute the fecks that have EVs and wonder what power source they have to heat their batteries when it is -10F at night.
        The coal trains from Wyoming take far more time to make it past the crossings than it takes me to gas up. I only do it every seven weeks.

    • NickL
      Jun 21, 2019 at 6:19 pm

      Well here in the Boston area even people who are working class (People making between $60,000 -75,000 a year) seem to have new SUVs and have this hard on for sport bikes and motorcycles

  10. Michael Engel
    Jun 21, 2019 at 12:16 am

    The party baster that wasn’t invited to Bahrain peace party sent
    London based Brent up 2.53% and WTI 5.74% today.
    Why the more sensitive Brent by the Hormuz event is up only half of WTI.
    Wet oil is black, but traders oil is green. Green is more important than black for few days.
    Traders in London, Zurich, Frankfurt and Paris set oil consignment
    paper prices to make profit.
    USDCHF fell, EURUSD rise and $USD declined yesterday.
    Fundamentals don’t matter to commodities and stocks manipulators.

  11. unit472
    Jun 21, 2019 at 3:17 am

    I concur. High oil prices are good for the USA and it goes beyond oil. That $9 spread between WTI and Brent and the even greater spread between US natural gas and LNG and Russian exports to Europe gives the US a real advantage in everything from agricultural commodities to chemicals to steel production.

    British Steel eg, woes are, in large part, related to the high price of electricity in the UK. Its almost double that of France and a third more than Germany. As Europe signed up for the Paris Climate accord and put its hopes in renewables their heavy industry will continue to decliine. Same for China too as their coal plays out.

    • Jack
      Jun 21, 2019 at 8:25 pm

      No it won’t be the same for China!

      “Mainland China has about 45 nuclear power reactors in operation, about 15 under construction, and more about to start construction. The government’s long-term target, as outlined in its Energy Development Strategy Action Plan 2014-2020, is for 58 GWe capacity by 2020, with 30 GWe more under construction.”

      Source the world Nuclear .org

      So while the Europeans pussy foot around the Hallowed Paris accord ! China has plans, plans to remain a country for the next 5000 years!

      The short term strategies that the western powers developed over the last 200 years indicated only that they couldn’t careless about the rest of humanity!

      Two major world wars, multiple invasions to countries as far as Japan!, destruction of Africa and South America, well…. you can Carry on..

      So yes, the Roman tried to civilize Britain, but that proofed too strenuous even for the legions, now I guess you can have back your island! and keep out of interfering in the rest of the world!

      So back to agriculture for you lot! And dealing with your Picts to the north :)

      • char
        Jun 21, 2019 at 9:34 pm

        More nukes in the electricity mix leads to less virtual free new renewable electricity, not good for heavy industry.

        ps. With virtual free i mean the sales price during part of the year, not the production prices. But the higher sell price during most of the year will pay for the production.

    • char
      Jun 21, 2019 at 9:27 pm

      New renewables have as feature that some parts of time (in total 20% of a year or so) electricity is virtual free. If you can create a Heavy industry that can run on that 20% than you are solid. Europe expects/hopes that they can create that heavy industry. If they can than an old tech Heavy industry based on carbon is walking a death march.

  12. Somerled
    Jun 21, 2019 at 3:33 am

    Burn Baby Burn! Burn All The Hydrocarbons! Not even an afterthought anymore is it…

    • Jun 21, 2019 at 9:50 am

      Someled,

      Hey, this is supply. And supply exists because there is demand. If there is no demand, there would be no supply, and no drilling. So LOOK IN THE MIRROR.

      Demand comes from people who drive, and who have kids they drive around and who later drive themselves; and from people and their kids who fly; and from people who use plastics and other petrochemicals in any form, from bags to clothing; from people who own cars, even EVs because they take a lot of petroleum products to build; from people who eat food that has been grown with petrochemical fertilizers, and from people who eat any food at all because any farming but subsistence farming requires equipment that is powered by fuel; from people who buy anything that has been transported, which is everything that you buy these days, even the device you used to write this comment, and even the peaches at the farmers market.

      So the only way to deal with this issue from your point of view is to do YOUR JOB first and deal with demand, before you bitch about supply: Don’t drive, don’t fly, don’t use plastics in any shape or form, don’t have kids, don’t eat food except food you grew yourself, and certainly don’t buy anything at all, not even the electronic device on which you wrote this because it was transported, and that transportation – likely involving trucks, planes or ships – was powered by hydrocarbon fuel. That is where demand is. Once demand collapses, supply will follow, no problem. So do YOUR JOB and stop creating demand.

      • Petunia
        Jun 21, 2019 at 10:12 am

        Thank you! The amount of nonsense being put out is frightening.

        • Erle
          Jun 21, 2019 at 11:07 pm

          There is a vast amount of fuel and children time being wasted from having consolidated school districts. The old schools had a principal and a secretary/nurse that were able to run the dump.
          Now we have an overarching bureaucracy of 300 that do the work of ten.
          If you value efficiency vote to bust up the school racket.
          I was knocked out when my city of 90k had twice the number of administrators than did the entire NYC Roman Catholic system.

      • John
        Jun 21, 2019 at 10:13 am

        Rocking Response!

      • IdahoPotato
        Jun 21, 2019 at 10:37 am

        I grow 50% of my veggies ad about 20% of my fruit consumption on about 0.2 acres. Am I allowed to bitch?

        • Paulo
          Jun 21, 2019 at 11:13 am

          You bet. We just hilled our 120 hills of russian fingerling spuds, the garlic and corn are rockets, and the bush beans are looking good. We only buy a few fresh veg in the winter, Dec-Feb. Plus, we don’t drive all that much. We can bitch about doing our best and watching the debt queens, (like Shale) eff up the economy and steal our savings.

          Wealth transfer in the Markets, in the under funding of services, the low interest rates and push for yield, and the debasement of currency thanks to people, Corps, and Govt using debt to replace cheap energy. And now, higher prices will further compound the problem. Look for rate decrease going forward….maybe right after ‘this sucker’ goes down.

          When food supplies are affected/threatened look for revolution, anywhere. Migration and exodus, anywhere. Upheaval. But hey, WW2 was 75 years ago and people have forgotten how fast things can spin out of control. Trade wars, tariffs, blockades, rising energy prices, and that great new crop growing climate of 2019 in underwater America, nah nothing to see here.

        • Jun 21, 2019 at 11:13 am

          A little. And after you trade your motor vehicles for bicycles, you can bitch a little more :-]

        • Bobber
          Jun 21, 2019 at 11:47 am

          Paulo I t hint we are within five years of end game. The doves like Kash Kari will drop rates to zero, then we’ll see the look on their faces when it fails to stimulate an economy that is burdened by debt and moral hazard. I’m routing for Kashkari. Because he’ll bring on the reset quicker. Nobody learns until we hit rock bottom.

      • Peter Starr
        Jun 21, 2019 at 2:34 pm

        Nothing to do with hypocrisy, our fuel-soaked suburban organism, alternative energy or green dreams.

        This industrial world economy and infrastructure is perilously close to expending (burning) more oil retrieving oil than is available to operate the economy . . . and also get more oil. That’s a conundrum, a predicament, a problem without a solution. End game. End times.

      • Somerled
        Jun 23, 2019 at 1:40 pm

        Here’s about 30 replies from people far smarter than me commenting on how far you are off. I read you daily Wolf and find you a great read most times but not this time in the slightest.

        https://www.nakedcapitalism.com/2019/06/wolf-richter-bring-on-higher-oil-prices-theyll-boost-the-us-economy-powell-sees-it-too-a-new-experience-for-the-us.html

        • Jun 23, 2019 at 3:08 pm

          Yeah, lots of people who have never lived in the oil patch and have no idea of the economics of oil and gas drilling get emotional about this. They hate fracking. I hate fracking too. But that doesn’t matter.

          What matters economically is that now the oil patch is huge and has spread across the US and is a big part of the real economy — manufacturing, industrial production, services, including technology and finance all of it with lots of high-paid jobs — as the US has become the largest oil producer in the world, after having already become the largest natural gas producer in the world.

          This is very new for the US, and people just don’t get the economic importance of it yet, and they don’t want to get it because the hate fracking (and I hate it too). That’s why I wrote the article to let people know that there are new dynamics at work now that the US has not experienced in my lifetime, and people who want to understand the real economy in the US need to open their eyes and look at the data.

      • Saltcreep
        Jun 24, 2019 at 5:17 am

        It’s not only about looking in the mirror, Wolf. It is mostly society as a whole that needs to change, and face up to the fact that the future must be one of much lower consumption of just about everything. (Not that I believe society is capable of such change, though, mind you…)

        It’s extremely hard to make truly significant changes just by changing our own personal behaviour. We’re a social species that lives in groups, and we don’t function well outside our societal context. We’d also probably starve to death if we tried to go zero impact.

        And whether or not we’re driving cars and flying planes personally, the act of living as part of the societties we’re brought up in depends on patterns of living that are highly energy intensive, and on value chains that stretch around the world and are run largely on fossil fuels. Heck, even the plate of food I had for dinner last night probably consumed far more fossil fuel energy getting to my dinner table than the energy I will derive from it by having consumed it…

  13. Nicko2
    Jun 21, 2019 at 4:16 am

    Usd$ down, oil up, CAD$ up ——. Good times, the oil will flow.

    • Prairies
      Jun 21, 2019 at 10:38 am

      The CAD only went up because the market thinks rate cuts are coming. It will be back down when reality sets in.

  14. Implicit
    Jun 21, 2019 at 5:06 am

    You have the stats, and I don’t. However my gut tells me their are unknown variables directly related to the present income disparity that will accentuate this disparity more, and that GDP will not balance out near evenly. Inflection points not understood. Things get ugly when people get hungary and can’t even afford Wally World food.

    • Implicit
      Jun 21, 2019 at 5:07 am

      that was hungry, leave Hungary out od this.

  15. David Hall
    Jun 21, 2019 at 5:33 am

    Not all shale fields are equal. The Permian Basin must be producing cash flow positive projects, else the cash flow positive major oil companies would not have been drilling there.

    China has recently discovered two tight oil fields. Argentina has an Eagle Ford type shale project. Saudi Arabia wanted to develop shale gas capacity. Numerous shale gas prospects produced liquid hydrocarbon byproducts. Columbia talked about needing some shale pilot projects. Britain shut down a shale oil well after a minor earthquake. California earthquakes shattered shale there making it unattractive to drillers.

    • Nicko2
      Jun 21, 2019 at 7:01 am

      The US maintains a tech lead in fracking, plus another key qualifier…plenty of ground water. China has a ground water deficit.

      • backwardsevolution
        Jun 21, 2019 at 9:27 pm

        Nicko2 – “plenty of ground water”. Wrong again.

  16. Silly Me
    Jun 21, 2019 at 5:42 am

    Fracking poisons the water supply and the environment, as it now finally hit the news in Pennsylvania. Not that it was not obvious from the beginning.

    Investing pension funds in shale is obviously corruption. I’m wondering who those “investors” are. There are several ways to make money on the stock market from shale’s losing money so predictably, so the question is whether the investors are also investing in those options.

    • RD Blakeslee
      Jun 21, 2019 at 8:19 am

      “Fracking poisons the water supply and the environment, as it now finally hit the news in Pennsylvania.”

      Citation, please? Where can I read that news?

      • Ethan in NoVA
        Jun 21, 2019 at 10:37 am

        A friend lives on property near fracking activity in PA and told us his drinking water is contaminated and useless. They have to use bottled for everything. On the flip side he gets free natural gas.

        • yerfej
          Jun 21, 2019 at 10:49 am

          And he told you that aliens have entered his pipes and he is going to use the excess gas to visit Venus. Yes you’re clearly on the cutting edge information wise.

        • NickL
          Jun 21, 2019 at 6:23 pm

          that’s one of the reasons things are cheaper in the middle of the country…. Horrible infrastructure (except for roads which are highly subsidized), many states like PA have schools that rank in the bottom half of rankings, opioid and heroin use is epidemic, drinking water is in drinkable etc.

      • IdahoPotato
        Jun 21, 2019 at 10:41 am

        Not that hard to Google “fracking Pennsylvania, water”. Thousands of hits. It’s not that hard, really. This is one I found in about 3 seconds.

        ____________________________________

        “Drilling for natural gas caused “significant damage” to drinking-water aquifers in a Pennsylvania town at the center of a fight over the safety of hydraulic fracturing, according to a report prepared by a federal official.

        The previously unreleased document from an employee at the Environmental Protection Agency’s regional office found that drilling or fracking, in which water, sand and chemicals are shot underground to free trapped gas, caused methane to leak into domestic water wells in Dimock, Pa. The findings contradict Cabot Oil and Gas Corp., which drilled in the town and said the explosive methane gas was naturally occurring.”

      • backwardsevolution
        Jun 21, 2019 at 3:37 pm

        RD Blakeslee – where have you been? This has been all over the news (documentaries even done on the subject) for years now, not that the industry and the media haven’t done their darndest to keep it quiet.

        The tiniest bit of research on your part would yield a harvest of information. Take the journey!

      • panatomic-x
        Jun 23, 2019 at 2:45 am

        one of the best things andrew cuomo has done as governor is keep fracking out of new york state. my brother has property on the new york side of the delaware river. on the pennsylvania side of the river,there are many reports of poisoned wells and cancer clusters. on the new york side, no such reports.

  17. Gershon
    Jun 21, 2019 at 6:10 am

    Now that Trump has backed down from retaliating against Iran for the shutdown of the US drone, will that avert a crisis in the Persian Gulf, or only embolden Iran to escalate its aggression?

    • Harrold
      Jun 21, 2019 at 11:29 am

      Perhaps Iran is not the aggressor.

      There were reports that 6 Iranian ships caught fire in the port of Nakhl Taqi on June 7th and that a huge fire consumed a storage facility at the port of Shahid Rajaee on June 5th.

      • Wisdom Seeker
        Jun 21, 2019 at 2:37 pm

        Fake News isn’t just a US domestic-politics issue.

        It’s very difficult to have any confidence in any so-called “news” relating to the Middle East. Too many sides with too many hidden and diverse agendas generating too much hype. Plenty of evidence that various alleged atrocities were staged or not actually committed by those being blamed. (One can also question much of the “news” from the rest of the world, but at least the density of atrocities is generally lower.)

        Wolf’s article further raises the question of how much various sub-elements of the US MIC and business community might be interested in manipulating oil prices upwards, now that the US is not on the losing side of higher prices?

  18. John
    Jun 21, 2019 at 6:26 am

    Thanks Wolf for the thought process and the writings once again. BP mentioned 400 million cars puts out as much carbon as 2 million EV. Just a thought.

    • Nicko2
      Jun 21, 2019 at 6:59 am

      Such a statistic is absurd.

  19. Robert Millman
    Jun 21, 2019 at 6:27 am

    Wolff–a simple questions: Why should oil rise in price given how much we produce and how good at we are? Remove the artificial geo -political problems, wouldn’t oil drop in price towards $40/barrel? Of course then many small oil E&Ps will go out of business or be taken over. You failed to discuss the ever increasing hostility towards oil and Natural gas among millenials and younger people.

    • Jun 21, 2019 at 11:08 am

      Oh, I didn’t say it SHOULD rise. And yes, everything is interconnected.

      I think WTI will have a hard time rising much past $80. At $75, it will unleash production in the US and flood the market with supply, thus bringing the price back down. There could be some short-term spikes, but given how responsive US supply is to the price, and how quickly production can ramp up, as we have seen, I don’t think WTI will get out of hand.

      Yeah, I don’t discuss “hostility” to any kind of supply. That’s hypocritical. But there should be hostility to demand. Supply exists only because there is demand.

      If people don’t like the supply of hydrocarbons, they should stop using the products hydrocarbons make possible. This will collapse demand, and supply will react, and oil and gas drilling will die. End of story.

      Any millennial who is “hostile” to hydrocarbons should stop taking an Uber to go out at night, should stop driving to work, should stop flying, should stop buying anything at all, including smartphones, because everything has been transported, and transports involve hydrocarbon fuels. So that’s where they should start: don’t drive, don’t fly, don’t use Uber, don’t have kids (they multiply the use of hydrocarbons), don’t buy anything, no stuff, no house, no car, and not even food, because it all, including farming, takes petroleum in some form or another somewhere along the line.

      Millennials who are “hostile” to hydrocarbons need to understand where the problem is, and the problem is demand for those products, not the supply.

      • Wisdom Seeker
        Jun 21, 2019 at 2:42 pm

        Educating people how to reduce demand without compromising lifestyle is going to be a fun social trend.

        To be fair to the younger generation, there are many ways to reduce hydrocarbon usage that don’t require a stone-age lifestyle.

        Using mobile to stay in touch with friends uses far less energy than driving to the mall (or wherever) to hang out did for the older generations.

        Several years back we had some holier-than-thou friends who critiqued our SUV against their midsize family sedan. What was funny was their complete obliviousness to the fact that that their 60-mile daily commute led them to burn far more gasoline than our 10-mile commute.

        Energy budgeting would be a really good target area for Common Core math homework…

  20. b
    Jun 21, 2019 at 7:12 am

    If raising the price of a commodity that everyone uses is “good for the economy”, then why wouldn’t just raising taxes and spending them be the equivalent.

    It’s not because neither is true.

    • Jun 21, 2019 at 6:10 pm

      The US is the producer of this commodity. This commodity is expensive to extract and requires a large amount of technology to do so. So this real and high-level economic activity, with good jobs, including lots of tech jobs and highly paid blue-collar jobs, and those people then spend the money they make and recycle it. Very different from just taxes.

      • char
        Jun 21, 2019 at 9:52 pm

        Taxes are spend so not so very different. Also taxes make fuel prices more predictable which is also good

  21. Daniel CIMA
    Jun 21, 2019 at 7:32 am

    This is so obvious, every oil-producing nation will profit, the US, Saudi, Russia etc except : Iran, China, Venezuela etc. Bolton and Pompeo, these scumbags are in Trumps ear and head… bomb… bomb.. now or never !! I bet my balls, they are already signing off on the next Golf of Tonk… ehhh sorry Gulf of Oman false flag. Scumbags.

  22. Iamafan
    Jun 21, 2019 at 7:43 am

    Back in the days when gas was going towards 5 bucks a gallon, I ordered a Prius and no dealer was able to take it for at least six months. Some charged a $5 k premium over sticker. My chance came when a buyer reneged on his order and I was able to get it at sticker. I also got the Fed Enerqy Credit. It was the high end model and I paid cash. Those were the days.

    I still don’t know why the market fell 2015-2016 and how it was “saved” afterwards. I somewhat feel that its rigged although I can’t prove it.

    Just like the price of gas, the economy doesn’t make much sense anymore. Who would think that the US will be self sufficient in oil? After the Saudi USD and the China USD recycling, what’s next?

    • Korkin
      Jun 21, 2019 at 10:37 am

      //I still don’t know why the market fell 2015-2016//
      “Elementary, my dear Watson!”
      The price of oil (oil futures) is a derivative of the Fed’s monetary base. The money machine slowed down in the summer of 2014.
      FRED: Monetary base year-on-year vs oil price.
      https://fred.stlouisfed.org/series/BOGMBASEW#0

      • Iamafan
        Jun 21, 2019 at 1:30 pm

        Very good answer. So the monetary base thightened. I get that. But how and why did it happen? QT was much later. This probably is what they refer to as ‘liquidity”. When the Fed stops buying large scale assets or does not rollover in full, something bad happens. Amazing.

    • Jun 22, 2019 at 10:50 am

      The drop in crude was the result of the Fed staying too low too long and corporate high yield expanding to that ridiculous point where they (Chesapeake Energy) could borrow money cheaper than the resulting drop in oil prices relative to supply. Once the Fed started making noises about rate hikes the crude market tightened. The market started dropping about the time rate cuts were back on the table. Crude prices reflect the strength in Corporate HY. War with Iran may be the deus ex machina to levitate crude prices (and save the US industrial base from recession). OPEC would be closed out of the market and oil the US exports is worth more. Such a move also puts pressure on the Iran/China oil deal, and puts a chill over the EU, (who is the biggest energy blackmailer, Putin or Trump?) which forces them to make political concessions to the US. You have to study the Iraq war and how 43 made the British PM a lapdog. Side effects; refugees and conservative populist uprising. Fed policy equals energy policy, which has been consistent over several decades.

  23. RD Blakeslee
    Jun 21, 2019 at 8:35 am

    ” When companies invest in US shale oil (and gas), it triggers a whole chain of activities in the real economy.” – Wolf

    Unfortunately it also causes radical greenies to go bananas and chain themselves to drilling and pipeline construction equipment, crawl into pipelines under construction (all happened locally within the last few months), etc.

    Ignored by the ignorant: The electricity fed into the grid by power plants to charge the batteries of EVs are increasingly using natural gas to replace coal, which burns dirtier.

  24. Beans baby
    Jun 21, 2019 at 9:12 am

    Excellent article, Wolf. We have to revise how we view jobs and money flow to make sense of US policy. I work in healthcare and have seen the same dynamic payout – increasing government transfers via the Medicaid system has been the intentional policy effect, despite all the political talk about bringing costs down and reining in fraud.
    We have to come to realize that like oil production, healthcare is made in the USA and increasing healthcare dollars spent means increasing the number of jobs created. There will be no decrease in healthcare expenditures without a negative effect on the overall economy via loss of jobs and therefore loss of money to spend. It is critical that we get rid of the ridiculous idea that eliminating governmental regulations is a good idea – strong regulations are the only hope of encouraging productive use of money spent into “made in the USA industries”. Without them we will become a nation that digs holes with spoons only to refill them.

    • Petunia
      Jun 21, 2019 at 10:17 am

      Healthcare, like all necessities, are being turned into wealth extraction systems in the US. It is not an accident, it is by design. Eventually, they will have a way of confiscating everything you own, including your labor.

    • fiat 2 infinite
      Jun 21, 2019 at 10:20 am

      Well enjoy free fiat while it lasts :)

      IMHO health-care mis-management is a main driver to the dysfunctional congrass, I knew kids out of college making $1M/yr selling drugs in 1985, their family all doc’s advised against the MD, said medical sales rep was the future, so here we have it, the future is now,

      USA medical is the worst in the world for care, and the most expensive to boot, only CONGRASS with their ‘free’ care could really feed this system, meaning that elected politicians get the best med care on earth, while they’re alive, but everybody else is on their own.

      • Petunia
        Jun 21, 2019 at 12:26 pm

        It’s already like that and I have what is supposed to be “good insurance.” This is the reason I support single payer, because I can’t afford to use my “good insurance” anyway.

        • Iamafan
          Jun 21, 2019 at 1:43 pm

          I used to be in Obamacare both with the subsidy or Advanced Tax Credit and without the subsidy. The premium of the non-subsidized Obamacare was super high. I couldn’t wait to get to Medicare. A B + D & Medigap Plan F costs about a fourth of Obamacare without subsidy.

          I pay less for drugs and doctors visits with Medicare. I haven’t tested hospitalization but since I am post stroke victim, I believe it’s ok since I visited the same hospital docs. I just visited my hematologist and had 0 copay.
          I really think that medicare for all is fine. It’s worth bankrupting Congress and the Treasury. We just can’t afford more wars.

        • IdahoPotato
          Jun 21, 2019 at 10:09 pm

          Single payer is the ONLY solution to this horrific mess. I have lived in three countries (all so-called democracies) and US healthcare is the worst by far while being the most expensive.

    • Wisdom Seeker
      Jun 21, 2019 at 2:47 pm

      Wrong: “There will be no decrease in healthcare expenditures without a negative effect on the overall economy via loss of jobs and therefore loss of money to spend.”

      You could say that about any spending. But spending is always a tradeoff. You have to ask what ELSE could be done with the same money? There are many, many more productive and beneficial ways that we could use the money spent on the bloated and inefficient healthcare system. Everyone has a list and it’s not a simple “healthcare or nothing”.

    • panatomic-x
      Jun 23, 2019 at 2:59 am

      @Beans baby it’s “health care.” “healthcare” is a made up phrase of the orwellian american health insurance industry. that’s the same industry, that has increased the number of health administrators exponentially while lowering the life expectancy of our country.

      single-payer, please.

  25. Winston
    Jun 21, 2019 at 9:30 am

    So, more investment now due to temporarily spiked oil prices leading to an even bigger 3rd oil bust is a good thing in the long term?

  26. Reddog
    Jun 21, 2019 at 9:38 am

    My question in junkail?

    • Jun 21, 2019 at 10:08 am

      I just now deleted it because I don’t tolerate war-mongering here. War is NOT funny.

      • don
        Jun 22, 2019 at 1:26 pm

        “War is NOT funny.” You’re empirically incorrect. You would be surprised at the amount of funny that happens in conjunction with the horrific during long interludes of boredom. I could give examples from personal experience, but they’d be politically incorrect.

  27. fubar
    Jun 21, 2019 at 10:14 am

    Wolf this really relevant to oil prices, and I can only think it means eventually less vehicles on the road, on average.

    All the hedge-funds, are telling me to sell GM, and buy LYFT?? WTF?

    What do they know I don’t know?

    Ok, I’m still long FCAU, but I did sell my GM, and use 1/2 proceeds to buy LYFT, what’s a mother to do?

    In the USA I can see this as a logical common denominator, albeit in ASIA ppl want to know who is giving them the ride, so anonymous strangers is still a long way off, but either way, the young feel no reason to ‘own’ an auto.

    • Jun 21, 2019 at 11:20 am

      There is one question you should ask those hedge funds: “Where do Lyft drivers buy their cars?”

      • Wisdom Seeker
        Jun 21, 2019 at 2:48 pm

        And a question to ask yourself is why a hedge fund would care how you invest your money? Unless they are trying to sell to you?

      • cd
        Jun 22, 2019 at 10:12 pm

        After Uber Exchange lost 6.5K per loan I wonder where they are buying the cars…..I sat in their office and looked at that model of weekly lease payments that were higher than a monthly program and said you guys are toast, thus no hire to run the dealer program. Hot money flows out of hands fast….

        Auto peak is here, down from here on out on SAAR…..

        Oil is not going back to $40, maybe a touch of $50 but we are now on the way back up to $76

        • Jack
          Jun 23, 2019 at 4:40 am

          Don’t bet on oil going up too fast cd!

          If the situation in the Persian Gulf escalate out of hand to hostilities ( i doubt this, if Trump wants a second term).

          The shock will drag the world economy into recession quicker than you can finish your “ Hail Mary “!

          So to balance things out we’ll have a protracted scenario where the appeasement of the market have to coexist with appeasement of the “ hawks “ in the administration!

          What Powell will be left with is further easing of IR’s and consequently market hovering around the current levels!

          This however preclude any sudden Iranian ( crazy reaction or action) that might happen in the next months!!!)

          The rush to get out will be far too costly for the US to react Violently to these unfolding events.

          But, you can never bet on a horse with a Tick ( sucking his blood and causing him utter discomfort)!!! :)

          Peace.

  28. Jun 21, 2019 at 10:43 am

    The big oil companies can eat the price increases. The industry keeps jobs and drilling rigs going, (consumers keep driving) borrowing cheap money, they can afford to take less on the crack spread, and the producers raise prices. Dollar goes lower we export more oil (China), domestic supply never overwhelms demand. Americans pay more, foreigners pay less, GDP remains strong. Inflation returns. Happy ending

    • sunny 129
      Jun 21, 2019 at 4:42 pm

      Spending ‘debt on debt’ is the new found ‘panacea’ which will solve, all the financial problems, private/public, world wide, right?

      Global debt to GDP – 250 Trillions/100 Trillions

      Nearly 70 Trillions added since ’09. Another 50 or 100 Trillions, doesn’t matter, right?

      Oh, My!

  29. Senecas Cliff
    Jun 21, 2019 at 11:32 am

    Unfortunately if real hostilities break out between the U.S. and Iran oil prices will not stop at the goldilocks price of $70 to $80. The reason there has been no attacks on Iran since 1979 is that their well known strategy if attacked is to cut off the flow of oil through the Straights of Hormuz. Despite the huge U.S. navel presence in the area this is easily accomplished with the thousands of anti-ship missiles they have hidden, the hundreds of torpedo and mine carrying speed boats stationed in the area. The danger level does not have to increase much above the current to cancel the ability of any oil tanker to get insurance. Something like 30% of the worlds oil flows through these waters and its cut-off could spike oil prices up to $250 a barrel or more and crash the world economy. Oil is a fungible commodity and if the world price goes to $250 then I don’t think the debt ridden shale companies would give domestic customers some kind of great discount just because the oil is produced here. Lets hope the sabre rattling of the last few days and weeks calms down and we can settle in to a calmer situation.

  30. Reddog
    Jun 21, 2019 at 12:29 pm

    I didn’t mean to offend anyone especially these days. I was actually trying to ask you a question to attempt to figure out how our foreign policy and military industrial response would be in if in fact the rising price of oil actually helps our country now when it used to hurt it. Again, please excuse my insensitivity. I am of a different age and don’t understand people’s feelings very well anymore.

    • Jun 21, 2019 at 5:56 pm

      Thanks for clarifying.

  31. Bobo
    Jun 21, 2019 at 12:30 pm

    Shale oil wells deplete quite a bit faster than vertical wells. I have a small interest in a well in Texas, the big production lasted only about six months. In Texas the Railroad Commission generally limits production to 111 barrels a day, the producers had to get a variance to produce more.
    In the old days of vertical wells an upfront “bonus” payment was common, could be up to several thousand dollars per acre, and the production could last for decades, albeit much lower initially than a shale well. Now the oil companies don’t seem to offer so much bonus up front. Plus, many oil companies will only offer 12.5% royalty, the legal minimum. If you don’t like it, tough luck, with forced pooling the oil company can force you to accept their terms.
    If you have mineral rights in a hot drilling area, do a little research on what is being offered. If you get some big check for the first months production don’t rush out and spend it all. It may not last long.

    • Bet
      Jun 21, 2019 at 2:54 pm

      IN the eagle ford 18 to 20% royalties was the norm Holdouts with large acreage got profit sharing I know ,my former farm has seven wells. We also got decent bonus
      Upfront with another when the three year contract was up That being said the oil companies work hard to screw the land owners as much as they can. Get a damn good law firm. My farm got 1500 per acre. Bonus but the last flip I read to the latest oil company was for 33 million That’s oil company to oil company. Landowners signed off long ago
      I have no love for lying oil companies
      Fracking is the worst We will pay for it health wise and environmentally

      As for me bad timing. I worked 20 years to pay off the farm had enough of a bad marriage and left before I knew what was coming. I am Fine now and happy I have plenty of stories what oil and money does to families. ESCaped that viper pit:)

  32. jb
    Jun 21, 2019 at 12:49 pm

    A lot of land owners become wealthy by selling their mineral rights for fracking.

  33. Wisdom Seeker
    Jun 21, 2019 at 2:59 pm

    3 follow-up questions not covered above.

    1) Wolf’s article says US used to import 12 million barrels a day. Over a year at $50+ per barrel, that was upwards of $200 billion per year in US trade deficit. Those net imports are gone, so why is the US trade deficit still so high?

    2) Annual goods trade deficit is still in the range $700-$900 billion, offset by about $300 billion in net services exports. Call it a $500 billion annual trade deficit. How much energy was used to make the items imported into the US? Should that be counted against US energy usage, or the country of origin?

    3) If trade is indeed to be rebalanced, and more of those goods were to be made in the US, how much extra energy would the US need to produce?

  34. tommy runner
    Jun 21, 2019 at 3:17 pm

    good post and stirring point of view judging from the comments.. do we own our labor?
    ‘somerled’ may be part of the ans to a praxeologic or pretzel logic (ty don/walt) conceptual argument.
    rd if I may, respectfully, I believe most of those folks have their hearts in the right place, they just want their offspring to have a chance in the game you have already won at brother.
    I would agree that a few people in possession of the planets resources finding themselves in a position to ‘sell’ these at a profit to the rest, is a ‘good business model,’ maybe I should feel guilty that the elevated gdp it brings doesn’t make me feel better about it.. but it doesn’t.. not even a tiny bit. im just not sure about using net on one side of = and gross on the other, admittedly, I have the same problem w/numbers that I have w/ letters..(i don’t know why they’re different). w/ that ill cop to having some ‘delicious’ ipa cooling in an on grid refer as we..write.

  35. CoCosAB
    Jun 21, 2019 at 3:26 pm

    In short… It seems that the US main street economy is almost totally connected to OIL!

  36. Michael Engel
    Jun 21, 2019 at 4:25 pm

    1) $SPX weekly (C) @ 2,950.26 gave a strong Bearish signal.
    2) UST 10Y weekly (C) @ 2.068% is over extended reaction, in a long term uptrend !!!, it will rise.
    3) $Gold weekly (C) @ 1,400.10 was stopped by a resistance line from
    above, gold is likely to decline.
    TA for free, no guarantee.

    • cd
      Jun 22, 2019 at 10:19 pm

      Gold is on course for 1620, SPX is going higher….1370 back fill of breakout should be a great entry….it will be fast and furious, catching all of those that wait for big pullback in the dust…..

  37. Kasadour
    Jun 21, 2019 at 4:57 pm

    I have an almost complete opposite take on the effect that the price of oil has on the US economy. Thinking of oil as energy, every economic achievement that the US has enjoyed up until now is because of low oil price, not in spite of it. That said, the price of oil today is not sustainable over ~$70. When it creeps up over $65-$70, it crushes economic growth until it collapses again. This is described as demand destruction, and you can set a clock to it. In fact, oil price in the aforementioned range for too long cause economic recession.

    If higher prices were to spur investment in shale production, and therefore boost production, it would only serve to unevenly front-load production because the “sweet spots” deplete rapidly. The faster they deplete the more expensive production becomes when more and more new wells are needed.

    And there is no mention of the devastating environment cost to US oil production unless it was addressed in a comment and I missed it.

  38. MCH
    Jun 21, 2019 at 6:28 pm

    Wolf,

    We may have to pay for higher gas cost through taxes, but look what we get in turn:

    Wicked clean air.
    A transportation system that is the envy of the world.
    And dare I say it, the best public education system all around.

    ….

    Oh wait, that’s the California from a different reality.

    My bad.

  39. Sporkfex
    Jun 21, 2019 at 7:34 pm

    How will higher fuel prices impact Amazon, UPS, FedEx, and USPS ? Will consumers order
    more stuff online to avoid driving ? Will the increased fuel cost hurt shippers beyond any increase in volume ?

  40. DCR
    Jun 22, 2019 at 8:51 am

    “Now that the US is the largest oil and natural gas producer in the world, higher prices for these products are actually beneficial to the overall US economy, just like they are beneficial to OPEC.”

    I think you’re off target with this analysis. Now that the U.S. produces approximately the petroleum products it consumes, if higher oil prices resulted in 1) fewer imported products as consumers absorbed the higher U.S. petroleum prices (i.e. import substitution) AND 2) no diminution of business activity by U.S. oil consumers, you might be marginally correct from U.S. GDP perspective. But I seriously doubt 2) would hold true. And the major effect would still be to make those in the oil industry better off at the expense of everyone else, which is the same effect you see from inflation of the price of any particular item. Inflation transfers the economic pie to those owning the inflating item, and from those consuming the inflating item.

    OPEC is in a completely different situation, as they are a massive owner and net exporter of petroleum products. Without question they benefit from an inflating oil price, as long as it doesn’t get so high it incentivizes the powerful to take the oil away from them.

  41. IslandTeal
    Jun 22, 2019 at 10:24 am

    Wow….. Just read through this. My head hurts. Wish Elon Tusk was here to interpret for me. Have a good weekend.

  42. Sinbad
    Jun 22, 2019 at 6:17 pm

    The US has been trying to raise oil prices, by knocking out other oil producers like Iran Venezuela and Libya, but it seems demand is falling faster than the sanctions.
    I have a feeling the latest gulf tensions are also an attempt to push up oil prices, but the downside of war to increase the price of oil, is it also pushes up gold prices, which makes the dollar look bad.
    Cutting Russia out of the oil market is probably the only long term solution for the US.

  43. dkmac
    Jun 22, 2019 at 9:04 pm

    There is a website called PricedInGold which has charts of lots of things priced in gold–including WTI Crude going back to 1950. It shows the average price of oil to be about 2.5 grams of gold/bbl, with a range of a little under 1 gm to about 5 gm. At the current price of gold and oil one barrel of crude costs about 1.25 gm.

    So lots of room for oil to go up in price (like double just for starters), unless you think gold is going to drop in price.

    • dkmac
      Jun 23, 2019 at 3:12 pm

      A couple more observations on this chart:

      1. Every 10 to 15 years the price oscillates between high prices over the average and then low prices, much like a sine wave, or maybe a square wave where you could have an average high price and an average low price. We are presently nearing the end of a low price period.

      2. Back in the 1950’s and ’60’s when the Texas Railroad Commission controlled prices (and production) for crude, the price was held consistently at 2.5gm to 2.7gm gold.

  44. panatomic-x
    Jun 23, 2019 at 3:16 am

    i’m not sure how long the shale miracle will last but it seems that, barring recessions, oil prices are on a long-term upward trend. as wolf points out, this is good at creating american jobs that service our domestic shale production. another way high oil prices help, is by increasing the cost of shipping stuff here from overseas. that helps encourage domestic production. again good for american workers. another benefit is that higher oil production, means more incentive for us to build energy efficient products which pollute less. the downside ot all this is higher consumer prices but i think it’s well worth the tradeoff.

  45. KiwiinCanada
    Jun 23, 2019 at 1:09 pm

    It seems reasonable to assume Iran could stop oil leaving the gulf for many months. I am not sure where India, China, Korea, Japan etc would get their oil from. This however would not specifically be an American or Iranian problem in an exchange of missile inventories between the two sides and a lot of wrecked infrastructure. (Ignoring the broader macro economic impact) Interesting, two parties locked in a dispute over nuclear proliferation and neither of them having as much at stake as the audience. Iran in fact seems to be inviting the balloon to go up as long as they don’t get the blame for starting it. The other side must clearly be seen to be starting it, seems to be the main constraint on actually going at it.

    This standoff could go on for some time. Iran believes it needs nukes and the other side believes it would create many difficulties hence no backing down. Assuming this does not blow up but persists it will be interesting to see how the “onlookers” who actually have most at stake line up on this one. India is already sending naval vessels to the gulf. Pakistan will likely support Saudi Arabia but will not be directly involved. Russia is likely neutral in real terms. China has interests in both Iran and Saudi Arabia. I am assuming some of the Iranian missiles will be aimed at Israel. Hence the Israeli airforce will operate with the US, Saudi, gulf states forces. Western European forces will be involved as well. A complicated web indeed.

    Some kind of backing off would be prudent but appears unlikely. The best guess is that Iran gets its nukes with all the ramifications and “peace” is maintained. If not US oil producers are going to get a big incentive to produce.

    • char
      Jun 25, 2019 at 7:52 pm

      Iran believes, with extremely good reason, that American talk about nukes is just an excuse to hurt Iran and that if Iran would give in to this America would find another excuse. Underdeveloped states like USA (mid ’40’s), USSR (late ’40’s) and France (mid ’50’s) could develop nukes in a few years. Iran is much more developed than those states and has been only a few years away from nukes according to Israel since 1990. This means a) they have the bomb since decades, b) are truely stupid or c) don’t want the bomb. My expectation is the answer is c) as nukes aren’t actually useful

      ps. Pakistan will likely support China. Russia & China will love to sell/provide weapons to Iran because American power will shrink fast with each day of the war. Iraq, Kuwait & Oman will ask the Americans to leave. Other gulf states will just loose hard. Europe is very lackey

  46. Unamused
    Jun 23, 2019 at 7:38 pm

    We have no use for fossil fuels, and almost no use for petrochemicals for that matter. We converted to solar hydrogen back in the day and it’s already paid for itself, and for upgrades, and for expansion. Now we sell hydrogen and electricity to the utilities because we’re not interested in becoming a utility ourselves.

    There are many examples, and more every day:

    fuelcellsworks.com/news/swedish-housing-powered-100-percent-by-sun-and-hydrogen/

    Eventually most everybody will do it out of sheer cost efficiency, but it won’t be nearly in time to save you from the effects of over a century of profligate use of fossil fuels.

    Sorry.

  47. ZeroBrain
    Jun 23, 2019 at 8:13 pm

    Wolf, I just don’t follow how this could be the case – investment would stop if investor experiences were negative in aggregate. People don’t like losing money. It’s not like the tech unicorns, where they can proclaim some future valuation/profit independent of ongoing cash burn; you are saying past profits (losses) over well lifetimes have been established. Something doesn’t add up.

    “shale oil-and-gas drillers have essentially been cash-flow negative in their entire history”

    • Unamused
      Jun 23, 2019 at 11:01 pm

      “Something doesn’t add up.”

      Fossil fuel markets globally are corrupt, rigged, and provided with over six trillion per year in subsidies. It is as the industry prefers, and economies and militaries run on the fossil fuel industry, so it is particularly favoured, including cash-burn companies. Don’t be so naïve.

    • Jun 23, 2019 at 11:19 pm

      Investors don’t lose money until the debt defaults. But if the companies keep getting new money — just think of Tesla — they can keep their old debts and all hopes alive. It’s only when they can no longer raise new money to pay off old investors that the music stops. This moment came in 2015/2016 for energy companies, leading to over 100 bankruptcy filings, but then the music started all over again when new money once again arrived.

  48. DV
    Jun 24, 2019 at 10:03 am

    The idea of OPEC+ deal is to keep the price at a level that keeps most US shale drillers cash flow negative. That implies $55-65 range for Brent, translating into $35-40 wellhead price for Permian and even less for Dakota. And then the point comes when the trend starts reversing. Older wells dry up all at once and the production falls. Even more money need just to keep going.

    • dkmac
      Jun 24, 2019 at 10:38 am

      Maybe there was a reason that the Texas RRC maintained the price of crude at 2.5 grams/bbl, twice the current price of oil.

      $110 oil just gets you back up to the long term average.

  49. lisa
    Jun 24, 2019 at 5:35 pm

    You may want to probe the ramifications to the US economy due to a bit of the consequences of the following:

    https://money.cnn.com/2017/05/01/investing/saudi-arabia-buys-largest-oil-refinery-port-arthur/index.html

    https://www.econmatters.com/2016/09/30-of-us-refining-assets-are-owned-by.html

    and those articles do not even begin to address the consequences to the US economy based on actual ownership of the crude oil sourcing.

    https://www.forbes.com/sites/ellenrwald/2016/09/15/saudi-arabia-is-buying-up-americas-oil-assets/#15a859ef1189

    It doesn’t really matter to the US economy if the US is only receiving minimal revenues, minimal money flows within this nation, and workers are receiving minimal real wages, nor if minimal tax revenues are going to US states or the Federal government.

    Just because the oil is sourced and processed within the boundaries of the US geographically does NOT mean that the US is even benefiting from the majority of the money flows that are generated from oil sourcing, and processing.

    Just because the oil is here does NOT mean that corporate money flows that are generated here are even benefiting the US. Dubai did NOT become the international hub that it is over the last 20 years without taking a lot of money directly out of the US. War schemes or no war schemes. No one is even examining the corporate money-flows of the convenient Saudi and US entities, and especially legislative and executive, and possibly judicial financial benefits that are bypassing any wealth distribution to any significant others, or places in the US.

    • Jun 24, 2019 at 6:26 pm

      Lisa,

      The corporate money flows in the US shale business are NEGATIVE. They benefit only the recipient, namely the US economy, and COST the investor. Investors are funding cash-flow negative oil and gas drilling. Over 100 oil and gas companies have already gone bankruptcy since 2015 and investors lost their shirts. And more will. But this money that global investors spend in the US is spent in the US economy and is recycled in the US economy. You’ve completely missed that. Please read the article.

    • dkmac
      Jun 24, 2019 at 7:31 pm

      There seem to be many people that have missed the true ramifications of foreign-owned US oil assets and businesses.

      If foreign entity owns enough oil refineries it can affect the amount of crude that gets bought, or product sold, thus manipulating at the margin the prices of both crude and products. If it owns it, it can take a refinery down for “maintenance” anytime it needs to manipulate prices or supply; if it claims it is for “safety reasons”, who’s going to argue?

      And what about foreign interference in US politics, which is illegal? A US-based subsidiary of a foreign corporation, employing US citizens, can legally make US political contributions can’t it? Certainly it can create PACs.

      So there are lots of non-economic benefits that can accrue to a foreigner acquiring all kinds of US oil assets that may dwarf the economic ones, or at least be worth the losses suffered.

      • Jun 25, 2019 at 12:33 am

        dkmac,

        What ramification of foreign ownership?

        For example, Citgo, the US refiner, transporter, gasoline retailer, and purveyor of petrochemicals, is owned by PDVSA, Venezuela’s state-owned oil company. Citgo’s US executives were arrested when they went to Venezuela for a meeting at headquarters…

        But to no avail. The US entity had issued bonds in the US and has trouble making interest payments. That’s what matters in the US.

        Companies that operate in the US and issue securities in the US are subject to US law. When they default on their US debts, the creditors get the assets or the company under the supervision of a bankruptcy court. This is what is awaiting Citgo. It has finally made an interest payment and might stay out of bankruptcy. If it defaults, the Venezuelan government will lose its crown jewel.

        So can Venezuela use Citgo to influence US policy or wreak some kind of havoc in the US? That’s funny, just the thought.

        If companies don’t sell enough product at high enough a price in the US, and if they’re not efficient at doing it, the competition will eat them up.

        There are thousands of oil and gas drillers in the US. Some of them are big, most of them are small. It doesn’t make an iota of difference who owns them. Each competes with thousands of companies.

  50. DV
    Jun 25, 2019 at 6:20 am

    Bottom line – shale is a loss-maker as an industry and private investors have provided what essentially has been charity funding . Basically, what people say now is that “investors” were so stupid so as not to see this. This is absolute nonsense. Effectively, they were directed (one way or another) by the government to fund loss-making operations. There is no other explanation for that. If this has been a pure commercial venture, it would have ceased to exist years ago.

    The accumulated negative cash flow stands at about 250 billion, with outstanding debt at well over 300 billion. The industry is essentially insolvent. The more they produce, the more loss they accumulate. Light crude is not needed in those volumes, it goes to storage, while the country still needs to import medium crude in substantial volumes.

    Gas – one Australian executive recently said that their gas is not competing directly with the US gas, because of the latter low heating capacity. The heating value difference with Russian gas can be as high as 40%. That means that at 7 Dollars/Btu the US gas should cost 4.5-5, because of the extra capacity that is needed to transport, store and use it. And spot gas is currently trading at about 140 Dollars in Europe, that is about 4 D/Btu. Period.

    How long can this continue? Who knows? This has been one of the most spectacular cases of capital misallocation. On the other hand, if not for this, the US economy would have been melting down long time ago.

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