Technology, Oil, and Government

Falling oil prices are a good thing. Except when they’re not. Or….

The irony in the falling prices is that the success of US producers using hydraulic fracturing and horizontal drilling technologies is partly responsible, along with slowing demand by struggling Asian and European markets. Now that success could come back to bite the so-called fracking industry and other drillers in America.

[Wyoming Governor Matt, R] Mead acknowledged that in the short term, lower gas prices will benefit businesses and residents in his sparsely populated state, where distances between towns are often calculated in hours instead of minutes.

But, he pointed out, “If we see low prices continue for some time, we’ll see rigs start to lay down. And it’s not just the direct revenue. It’s the hotels, restaurants and all that goes with that.”

Not to mention jobs.

This is normal in a free market economy, though. New technologies, or old technologies like fracking whose time has come, are always disruptive. Recall the stereotypical, but no less accurate for that, impact on horse-drawn buggy and whip manufacturers with the advent of the horseless carriage and then the assembly line for making those automobiles cheap.

So it is with fracking. Not only does it make hard-to-get oil and natural gas (much) easier and (much) cheaper to get, it drastically increases the supply of these commodities, each of which individually drastically lowers the price of these, and together they synergistically do.

But when supply overshoots demand, and the price obtainable for oil and gas cannot cover even the lowered cost of extraction, many of the suppliers, extractors, stop producing, stop extracting. This has negative effects on both fracking jobs and the ancillary jobs Mead mentioned.

However, in a free market, supply and demand quickly match each other, and prices—and jobs—stabilize. With the technological advances associated with this commodity, too, as with any technological advance, the new pricing equilibrium will be lower than the prior equilibrium. It’s uncertain whether oil and gas pricing in particular will stabilize at their current levels, continue a little lower, or go a little higher. But it’s virtually certain we’re done with $100 oil for the foreseeable future, which is to the good of utilities, manufacturers, consumers, and anyone and anything that uses energy.

And those jobs? They’ll recover with the stability and predictability of the new normal in oil and gas extraction. The widespread use of fracking and related technologies also will lead to a net increase in employment when all is said and done, just like in those early automobile days.

The kicker here is identified by Kathleen Sgamma, Western Energy Alliance Vice President of Government and Public Affairs [emphasis added]:

There is a point at which the lower commodity price combined with the increased regulatory cost will put new wells out of business—they just won’t be drilled[.]

And [emphasis added]

whether a well is on private, state, or federal land, “because the regulatory environment is such that it makes it more expensive to develop on those federal or tribal lands.”

Government’s intrusive regulation wasn’t a factor in Henry Ford’s disruption.

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