The Fracking Boom Has Been An Economy-Sapping Information Blackout
The sharp decline in the price of a barrel of oil from over $100 last summer to $80 has predictably generated all manner of commentary as to its cause. Not surprisingly, the vast majority of it is wholly false.
Some have suggested that the drop signals a weaker global economy for what is very much a global commodity, and then others have pointed to increasing supplies of the commodity thanks to "fracking" as the source of the decline. Both miss the real story by a mile.
Considering the supply argument, missed by those who employ it is that as Gregory Zuckerman pointed out in his 2013 book Frackers, by the 2013 "the United States was producing seven and a half million barrels of crude oil each day, up from five million in 2005." Yet while a barrel averaged $50 in 2005, by 2013 the average had risen to $89. The supply argument is discredited by the very production numbers promoted by fracking's greatest enthusiasts.
What about the economic growth argument? It's similarly revealed as wanting by those same numbers. Whatever the state of the global economy today, no one would mistake any presumed modern weakness for what prevailed up to 2013 when global growth remained very limp.
The only true answer to falling global crude prices is what's always moved them: the U.S. dollar. As the late Wall Street Journal editorial page editor Robert Bartley explained in a 1986 speech given to the Forum Club in Houston, "Throughout the instabilities of recent decades, the price of oil in gold has demonstrated a powerful tendency to return to the area of 12-14 barrels an ounce."
Gold, thanks to its historical stability as a measure of value, is the best measure of the value of the dollar. When gold rises it's a signal of a weakening greenback, and when it falls it's a signal of renewed dollar strength. As evidenced by the declining price of gold to roughly $1170, the dollar has strengthened quite a bit of late, and its strength is revealing itself as one would predict through falling crude prices.
At $79/barrel, a gold ounce presently buys 14 barrels of oil. This is all elementary. The dollar is rising as the gold price signals, so oil priced in dollars is in decline. Oil hasn't become cheap, rather the dollar has been exhibiting renewed strength.
Where it gets interesting, and arguably tragic, is to consider where the price of oil would be had the Bush Treasury mimicked the dollar policies that mostly prevailed under Presidents Reagan and Clinton. When George W. Bush took office a dollar bought 1/270th of an ounce of gold. Based on the ratio described by Bartley back in '86, oil would presently be trading in a range of roughly $19 to $22 barrel. On its face it's fair to say that had the Bush administration protected the dollar, Americans would be paying a great deal less at the gasoline pump, not to mention how much lower would be their grocery bills for meat, bread, cereal, and other commodity-based goods priced in dollars. To put it very bluntly, cheap dollar policies pursued by Presidents Bush and Obama eviscerated the paychecks of the very Americans least able to endure such a policy. Yet the story gets worse.
Houston, TX-based Baker Hughes is one of the world's most prominent oilfield service companies, and recently USA Today reported some very sobering statistics provided by Baker about the "'break-even' price in the U.S. for most shale oil producers - or the point where it's no longer feasible for companies to launch new drilling projects." The range of prices came in around $55 to $70 barrel. In North Dakota's Bakken Core it's $61-$70, at Eagle Ford in South Texas it's $53-$60, in New Mexico it's $68.
What these numbers tell us beyond a shadow of a doubt is that absent the weak dollar policies that have prevailed since 2001, we've quite simply never heard of North Dakota as a source of oil, nor have we heard about Pennsylvania's revival as a fracking locale despite "break-even" prices there in the $32-$40 range. Put very plainly, the thriving nature of many U.S. oil locales has wholly been a function of most Americans suffering pay in dollars that have been cruelly devalued by Republican and Democrat presidential administrations. Sadly, the story gets even worse.
Taking nothing away from the amazing advances in the area of oil extraction of the fracking variety, the reality is that much of this modern extraction and investment in same has been a function of a weak dollar. What this tells us is that the fracking boom has in truth amounted to an economy-sapping information blackout whereby money illusion has driven always limited investment into the extraction of a commodity so prosaic that it's ably done in backwards countries like Russia, Saudi Arabia, Nigeria and Equatorial Guinea. The latter in mind, is it any wonder that the U.S. economy has exhibited abnormal weakness alongside a fracking renaissance (the technology is at least 50 years old) that has oddly captivated so many?
What's not been asked enough is what we've lost since 2001 in terms of amazing commercial advances. Assuming a continuation of the dollar policies that were the norm in the booming ‘80s and ‘90s, we would doubtless be importing a great deal more "foreign" oil at much lower prices, but with extraction in places like North Dakota not remotely economic with a healthy dollar, the investment that has flowed into energy investments wouldn't have sat idle; rather it would have migrated toward the stock and bond income streams representing the wealth of the future.
The "seen" in this scenario has been all the job-creating investment that materialized in pursuit of that which is plentiful globally, and that can be easily sourced by some of the most backwards countries in the world. The much more tragic "unseen", however, has been all the job-creating investment in the high-tech concepts that the rest of the world can't do, but that never took place.
Economies are always and everywhere powered forward by information; the information gained through experimentation in new ideas. But thanks to horrid dollar policies pursued by the Bush and Obama Treasury departments, an economy reliant on new information has suffered a blackout of sorts due to a money illusion that made the prosaic relatively attractive.
Thankfully, the dollar's economy-wrecking decline has been reversed, the price of oil is falling, and the information economy once again has a chance to revive itself. For all of its merits, fracking in the U.S. represents a slow-growth detour into our economic past. We'll know the U.S. economy is set for a true rebound once this detour is corrected due to a stronger dollar such that we get back to doing what others around the world can't do, as opposed to what so many can.
