Oil Prices and The United States - James Woodruff

Oil prices are below $80 for the first time (outside of this month) in years. What does this mean for the U.S.? The vast majority of Oil and Gas production in the United States involves the new technology of fracking. However, fracking is more expensive than more traditional methods. Many industry specialist believe a price of $75 or lower will result in a draw back in exploration in production. What does this mean for the U.S.? Reduced production requires us to increase energy imports, increasing our reliance on other countries. However, a reduction in production results in a reduction in supply (holding alternative production constant) resulting in an increase in price - essentially removing the less secure production efforts. The real question is: is this necessarily a problem? It is the natural evolution of a market to remove the weaker players.

What policies can counter act falling prices? There is already a negative production externalities revolving around Oil and Gas production (pollution to name one). We could implement a "carbon" tax that traces your emissions and taxes you accordingly. Such a tax could be implemented once the O&G price falls below a certain level, say $75, which would remove a lot of the pressure on production companies when the price inevitably falls.