Opinion & Analysis

Low Fuel Prices Can be Good for Oklahoma

January 21, 2015 1:23 pm - By: Richard V. Engle

Gasoline prices in Oklahoma City are near pre-9/11 numbers.  Many are predicting doom for the state's economy which depends on oil and gas production.  Continental Resources CEO, Harold Hamm, announced late last year that his company was slashing its drilling budget by over 40%.  Other companies are announcing similar or greater cuts in drilling.  It certainly looks bad for Oklahoma.

However, there is a silver lining on this foreboding cloud over the state.

To understand how it could be good for Oklahoma (and other oil producing states) we need to understand why the prices are falling.  Certain member states of OPEC (Organization of the Petroleum Exporting Countries) have flooded the market with cheap fuel.  This was in response to significant improvements in U.S. domestic oil production and as a response to other international influences.  Fracking and other innovative methods along with aggressive exploration has increase domestic oil production by 70% which has reduced oil imports from OPEC members by 50% since 2008. 

As the U.S. cut its dependence on OPEC oil, competition for the emerging Asian market heated up.  Saudi Arabia discounted the price of crude to Asian refineries to maintain a market for themselves.  According to Hamm, Congress should move to end the crude oil export ban and permit American oil to be exported to Asia and other emerging markets.  Hamm's plan would expedite the restoration of a market based price of energy worldwide.  

If we can provide oil ourselves then why would we buy oil shipped in from the Middle East?  We wouldn't and this is well known.  There is no effort to buy their way into our hearts with cheap oil, instead the attempt is to diminish the economic incentive to produce domestically.  If our production plummets, they will raise the prices again.  When that happens Hamm and other wise oil producers will kick production back into gear.

It may mean a bit of suffering in the short run for many good people working in the U.S. energy sector.  In the mid-range, we may see a see-saw effect on prices. Prices go down and domestic production drops off.  Prices go back up and domestic oil begins to flow again. 

In the long run, the great news is that OPEC is defeated by true market forces.  I know of several oil men who want OPEC nations to stop flooding the market so that they can get back to work.  These free market advocates unwittingly support the artificial price fixing of a cartel.  One can't blame them entirely as they see that current prices are artificially low.  But that is how price fixing works.  Prices that are set artificially (be it high or low) are a means of control on the market.  The only way to find out the true market is to put the final nail in the coffin of OPEC. 

What happens if OPEC and its major member, Saudi Arabia, lose all control over oil prices?  The prices will stabilize.  Energy producing businesses will be able to better predict how much they can produce and how much they will make doing so. 

But a more important thing happens if energy costs become truly market based for the long term.  Every business uses energy.  Energy consumption is the means of productivity.  Once an industry makes use of available efficiencies, any further reduction in energy use demands a reduction in output. Stable, market based energy costs permit every business to maximize productivity in a way that they have not been able to do since the energy crisis of the 1970's. 

From the perspective of the average guy on the street or the average businessman in the board room, productivity may not appear to be significantly impacted by the actions of the Sheiks of the Arabian Peninsula or their cohorts in other oil producing nations.  But the invisible hand of the marketplace, as described by Adam Smith in his landmark Wealth of Nations, is the only trustworthy control on prices.

We can't know what did not happen, what productivity never occurred, what industries would have grown but didn't because a cartel was influencing the price of energy.  However, we can know that the market, when left unfettered, is the best way to maximize productivity in every industry.

It may be painful for a time, but freedom from extra-market forces will be a reward.  And every economy will find its productive zenith if Smith's hand has free reign. 

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Meet Richard Engle

Richard Engle

Richard Engle is a Past President of the National Federation of Republican Assemblies which is the nation's largest and oldest Republican support organization.

Richard was twice elected to his local city council and twice elected to the Oklahoma delegation to the Republican National Convention including serving on the National Rules Committee in 2000 where he successfully placed a minority report on the floor of the convention - the first, and most recent since Ronald Reagan did the same in 1976.

Richard is President of BellWest America. Richard and Denise, his wife of nearly 30 years, live in Oklahoma City. Denise Engle serves as Workers' Compensation Commissioner for the State of Oklahoma. Richard speaks and writes often on matters of public policy.

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