For the State of the Union Speech, First Lady Michele Obama hosted a variety of politically pleasing guests in her box. An astronaut, an immigration activist, a gay basketball player – but no oil and gas producer. That’s a shame. The most positive thing that has happened to middle-class Americans in years has been the precipitous drop in gasoline and fuel oil prices. The nation’s oil and gas producers – many of them small companies -- can take much of the credit. It would have been nice to see a couple of ten-gallon hats in the presidential box.
President Obama’s approval ratings have enjoyed a bit of an uptick in recent weeks, reflecting a stronger economy and higher consumer sentiment. One of the major underpinnings of that improvement in the nation’s fortunes – and prospects going forward – has been the country’s remarkable increase in oil and gas production.
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High-minded commentators not partial to the energy industry have twisted themselves in pretzels trying to portray lower oil prices as a mixed blessing. People filling up their tanks with $2 gasoline know better. A jittery stock market and some convulsions in oil-dependent economies like Russia have confused a simple fact: Americans, and especially low-income Americans, have received a big after-tax boost this year as oil prices have been cut in half. Yes, some jobs will be lost in the oil patch, a few banks will be rattled and certain resource-rich states will suffer a downturn in revenues, but for the country overall the drop is very good news indeed.
The Energy Information Administration recently predicted, “The average household is now expected to spend about $750 less for gasoline in 2015 compared with last year because of lower prices.” In addition, people in the Northeast and Midwest using heating oil and propane to heat their homes will save some $750 on fuel. Those are big wins for average Americans. Bigger, just for the record, than the $500 tax credit for middle-income households that Obama seems so excited about.
With middle class incomes stagnant, the cut in fuel costs is meaningful and could prop up consumer spending. Since those at the lower end of the income spectrum spend relatively more of their budget on necessities like gasoline, the benefits from lower oil prices will be felt most especially by lower-earning Americans. The Census Bureau reports that families earning less than $70,000 annually spent about 6 percent of their income on gasoline in 2013 versus 3.4 percent in households earning more than $150,000.
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This meaningful boost to discretionary spending by so many Americans has lifted the nation’s mood. A new Gallup poll shows a sharp turnaround, with 47 percent of the country saying they are better off than a year ago, compared to only 35 percent this time last year, and only 27 percent saying they are worse off, down from 42 percent last year. The jobs picture has brightened, for sure. And the stock market rise has certainly benefitted many. But hiring was on the upswing for most of last year, and stock prices have increased each year since the financial crisis; lower gasoline prices are the new element here. Another Gallup survey shows 41 percent of the country very or somewhat “satisfied” with the state of the economy, up from 28 percent a year ago.
Surging U.S. oil and gas production, mainly from increased use of hydraulic fracturing and horizontal drilling, has surprised industry forecasters, and has shifted world markets. In 2008, U.S. oil production averaged less than 5 million barrels per day; a modest increase the following year marked the first uptick since 1991.
This year, output is expected to average 9.3 mb/d. The Obama White House has been at best a bystander to this remarkable advance, which has mostly taken place on private lands. At worst, it has placated environmentalists by slow-walking federal permitting and by placing federal acreage off limits to drillers. The cynicism of their approach was highlighted just before Christmas when the administration made headlines by outlawing drilling in 52,000 acres of Bristol Bay – a region in which oil companies had virtually no interest.
While the immediate cause of collapsing oil prices has been the decision by Saudi Arabia to maintain excessive oil production in the face of slowing demand, the increase in U.S. output has contributed to the excess supply that is undermining prices. The Saudis have excellent political motives for resisting the call to rein in production – the collapse in price is especially painful to archrival Iran – but OPEC’s largest producer doubtless also sees some benefit in undercutting growing U.S. high-cost supplies. The drop in price has already led to a reduction in the number of U.S. rigs drilling for oil; a drop in production will follow.
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The cycle will play out as it always has, with lower prices driving demand up and supply down. In addition, cheap oil will hurt higher-cost alternative fuels by making it harder for environmentalists to convince the public to subsidize and invest in solar and wind power. It may take a year for oil prices to begin to recover – it could take longer. Much will depend on the Saudis.
For the time being, the boost to our economy from cheaper energy is welcome, especially as growth falters in important markets like Europe and China. And especially since other initiatives promised by President Obama in past State of the Union Addresses, like doubling exports by 2014 (2010 speech) and bringing back manufacturing (a new study shows only tepid growth in the sector, despite claims to the contrary from the White House), have failed to materialize.
Meanwhile, Americans are feeling better about life, and better about their president. Some 84 percent of Americans in the latest Gallup survey declared themselves satisfied with their quality of life. It seems only fitting that Mr. Obama should have paid tribute to the authors of his success, and invited some wildcatters to share the First Lady’s box.
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