You may not realize it, but we are living through an energy revolution. Thanks to new production methods, the past five years have yielded a phenomenal increase in domestic oil and gas production. U.S. crude oil production, which had averaged around 8 million barrels per day (bpd) in the 1980s, declined a low of less than 4 million bpd by October 2005. Since then, production has soared to 10 million bpd as of November 2014. About half of this total comes from only three mega fields in the lower 48 states: the Permian Basin (centered around Midland, Texas), Eagle Ford (West Texas and New Mexico), and the Bakken formation (North Dakota and Montana). The result is a dramatic reduction in foreign imported oil from 60% of U.S. consumption in 2005 to about 27% by late 2014.
The cost to release this crude oil from underground reservoirs ranges from about $50/barrel to $80/barrel, with an average of about $65 to $70/barrel. With oil currently trading in the neighborhood of $60/barrel, domestic producers are feeling pressure. If prices do not rise, there will be a reduction in U.S. production—it’s a simple matter of dollars and sense.
However, oil is a global commodity, meaning that crude oil trades at about the same price (excluding shipping costs) everywhere in the world. Low oil prices reduce margins for both U.S. producers and foreign producers. Many of these foreign producers (e.g., Libya, Iran, Venezuela, and Algeria) have seen dramatic declines in crude oil production between 2008 and 2013. This, combined with the fact that many countries that are overtly and covertly hostile toward the U.S. maintain their current leadership with the help of petrodollars, makes for a volatile combination.
Low oil prices contribute to reduced gasoline and diesel prices at the pump, certainly beneficial to consumers. Plus, the average cost in the U.S. of all types of energy is significantly lower than in European countries and Japan, which equates to an economic advantage to American consumers and companies.
The dark side of low oil prices is that not everyone likes them, and oil prices are very sensitive to international unrest and uncertainty. Russia, a major oil and gas exporter (and member of OPEC), would stand to gain handsomely from higher oil prices. With Putin’s forces occupying portions of Ukraine, and threatening control over larger regions extending west to Transnistria and Moldova, it is easy to imagine a regional conflict that disrupts energy flow to Europe, driving up prices. The Russian economy would benefit as would Putin’s political standing.
In the Middle East, ISIS (or ISIL if you’re running around the inner circles of the Obama administration) generates substantial income from the sale of oil. The same can be said for Venezuela, Libya, Iran, Iraq, and Saudi Arabia. Like Russia, the domestic economy—and domestic tranquility—of these countries improves with increasing oil prices.
Are low oil prices good or bad? No doubt consumers benefit from reduced energy prices. However, in a global environment already fraught with tensions stemming from bitter political and religious differences, low oil prices only provide another reason for regional conflict.