It can be argued that a large part
of America’s recovery came through the American Energy Resurgence (largely due
to fracking). Over the last couple of weeks, the effects of American Energy
companies’ incredibly impressive energy production has led to some unintended
consequences: oversupply of the market. Currently, the price of oil has dropped
significantly over the last couple of months, with the West Texas Intermediate
(WTI) hovering around $78 and the Brent Crude Oil at $83. This creates losers
and winners: energy companies will obviously be hurt as their product’s value
has diminished, but consumers will benefit due to lower gas prices (more money
in their pockets to spend on others items). Additionally, lower energy costs
means that more businesses can conduct themselves more cheaply (especially
agriculture). Interestingly enough, a 10% change in oil prices is associated
with a .2% change in global GDP. In America,
the results are going to be more confusing because it is the world’s largest
importer, producer, and consumer of oil all the same time.
Thus the
question becomes, does Congress intervene to push up oil prices (either by
restricting production/sale in America or restricting importation of oil, further
propping up an already heavily subsidized industry) in an effort to prop up
energy companies or does Congress allow the free market to work itself out? For
the sake of argument, lets conduct a simple cost-benefit analysis test. With
the assumption that without policy intervention, the price of oil would fall to
$70 (according to analysts at Goldman), this would result in a large cut back
in US energy production as the expensive fracking techniques to extract and
produce oil would no longer be economically worth it. This would imply that
they would be the loser and your everyday consumer would be the winner. If
policy intervened, and buoyed the price of oil around $80, it would allow the
costly fracking techniques to continue, but would reduce the benefit of cheaper
oil for the everyday American. The question becomes would individual firms
conduct more business with cheaper energy to offset the loss of production of
energy firms? I would recommend against Congress intervening, as it is likely
to cause unforeseen distortions. It would likely cause a price war with foreign
producers as we are artificially setting our prices.
http://www.economist.com/news/international/21627642-america-and-its-friends-benefit-falling-oil-prices-its-most-strident-critics
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