Oil's catch-22 dilemma
When global oil prices tumbled from $145 per barrel in July 2008 to an average price of $100 for West Texas Intermediate in the 2014 aftermath of the great financial recession, it was assumed global Brent crude at roughly 10% higher and “Texas light” would stabilize at these prices.
What neither Saudi Arabia nor Russia, the world’s 10 million-barrel-per-day producers considered was the outburst of U.S. hydraulic fracturing (fracking) that made these prices less cost-effective within a short time period (2011-14). U.S. crude oil production had skyrocketed from 3.4 million daily barrels to more than 10 million by mid-2014.
This ignited an unanticipated price war as U.S. domestic oil refineries switched to American light crude from the various shales such as the Bakken Belt, Permian and Marcellus basins, which were readily available. Since the U.S. is by far the largest user of oil derivatives (20 million barrels per day) in the world, this shift to “buy American” threw OPEC into a panic which resulted in severe price cutting within a six-month period prior to an emergency meeting on Thanksgiving Day in November 2014. By then oil prices had tumbled to the mid-70s and it was hoped a severe Saudi Arabian-led production cut would stabilize the price tumbles.
Not only did the Saudis refuse to cut back, but non-OPEC Russia and the U.S. fracking surge accelerated its output in the meantime.
This instigated a global crude oil price war that brought prices down to as low as the high 20s by late 2015. While early 2016 saw a temporary bounce back to the low 60s in the spring of last year, a fall back to the low 40s by mid-summer resulted in a partial cutback agreement in November 2016, including non-OPEC Russia and Iran, which had been freed from sanctions by a U.S.-inspired multiyear agreement.
While optimists expected price increases from the current low 50s per barrel of West Texas Intermediate, neither OPEC nor Russia counted on the simultaneous reaction by the U.S. energy fracking outburst.
While corporate providers of oil production components, especially drilling rigs, had cut back selling prices significantly in light of the unexpected price drops, the recent OPEC partial cutbacks have resulted in a stimulative impact on America’s oil production component producers. In November alone, drilling rigs, especially, generated the highest level of availability in a year.
Additionally, the great variety of overall component providers raised their prices, erasing the previous benefits of price cuts offered to America’s leading oil producers. The optimists’ hope for a return to $80 per barrel as an oil industry profit maker have gone up in the smoke of an oil price squeeze with the low to middle 50s per barrel for WTI that the global oil industry will have to settle for throughout most of this year.
The comeback of independent business
Although 2016 recorded one of the worst performances in independent business formation in decades, this year is beginning to reverse this trend, as President Trump is starting to make good on his pre-election promises.
Trump is well aware of the fact the bulk of manufacturing and major service jobs has shrunk dramatically since the late 1990s. This negative trend was magnified by the thousands of mechanical and technological craft personnel whose previous technical training schools had been largely shuttered in the latter part of the 1900s.
This growing negligence opened the door to a growing segment of America’s manufacturing sector being relocated in both emerging and proven industrial overseas leadership economies. These provided U.S.-based large conglomerates with low-cost capabilities to engender higher profits.
This trend was visibly accelerated during the two terms of the previous administration, which provided America’s large consumer sector with a wide range of foreign-made goods with an American brand name. What had not been generally known was the products produced by divisions and/or subsidiaries outside the U.S. could be brought home with little, if any tariffs imposed.
While the policies necessary to even out this overseas manufacturing advantage by American companies will be evolving in the months to come, such finality likely will take many months to implement so as not to create havoc in the methods of distribution.
Since independent businesses had been the major “victims” in the surging imports of American-branded goods from abroad, the forthcoming Trump policies to expand industrial production and employment likely will make themselves felt affirmatively as this first term of the Trump administration unfolds, but not before at least two years have passed prior to midterm elections.
Will the U.S. manufacturing base recover?
In an intensive review of the manufacturing employment levels that dropped from 20 million to almost half that amount since this century’s beginning, it has become obvious the growing U.S. consumer sector was benefitting from the cheapest goods available worldwide.
It is particularly apparent that America’s many conglomerates with divisions and subsidiaries overseas were benefitting from this low-cost approach, as well as the ultimate user paying lower prices. In doing so, the rapidly expanding U.S. population also was incurring low employment levels while so-called food stamps for the unemployed reached all-time highs during the last four years of the previous administration.
While evolving technology also has played a major role in this evolution away from America’s traditional enlarged factory base, the booming stock market reflected the benefits accruing to the multinationals. These benefitted from the bevy of consumer goods available by widening their profit margins displayed quarterly in their stock-market reports.
Such continuation of de-industrialization, if not reversed, would result in frozen wages and ever higher unemployment payments to the many potential workers finding increasingly fewer working opportunities.
This shift of trillions of Treasury debt dollars to unemployment payments also made that shift away from the badly needed U.S. infrastructure of highways, rails, bridges, dams and pipelines, which haven’t been upgraded since the Eisenhower years dating back to the middle 1950s.
In a reversal of such industrial shrinkage, the Trump administration is making a push toward a strong return to buy “Made in America,” while making it more expensive for American corporation divisions to import such products from subsidiaries in “low-cost” countries such as Mexico, China, Southeast Asia, etc.
Will Ethanol be abrogated?
With the Trump administration emphasizing fossil fuels (coal, oil, and natural gas) production in general, and energy independence specifically, the previous multi-year emphasis on renewables may find itself on the energy backseat.
Although such alternatives as geodesic, wind and especially solar power likely will be viewed as supplemental in the forthcoming Trump energy assertion, this could have a particularly chilling effect on the fast-growing ethanol industry, benefitting by congressional demand of 10% composition in each gallon of gas. This was cobbled up during the oil derivative shortage early in the century prior to the fracking upsurge.
With the current U.S. oil derivative low-priced energy expansion running at full tilt, ethanol would seem extraneous under current and future planned oil production. But this paradox is being strongly contested by the renewable fuel standards congressional resolution (RFS), which was just recently upped to a new higher percentage. This dramatic change is running headlong into the political power of the “corn-producing states” in America’s Midwest, to which Trump made strong RFS retention promises.
This upcoming confrontation between fossil fuels and renewables is destined to become extremely political, as coal mining is being promised new life for domestic utility power usage, as well as increased exports.
What seems to be in the cards as the econo/political contradictions reach full bloom is a lowering of renewable energy as the future standard in the sectors affected by the renewable vs. standard fossil fuels standoff. With Trump’s cabinet heavily favoring fossils, this issue will have to be resolved on the congressional floor as well as in the cabinet-level dissertations.
With midterm elections beckoning in 2018, the future of a major coal revival and the future retention of no longer needed ethanol and lessened renewables will emerge as a major political showdown as the next election contest emerges.