Pushing Back Against the 'American Recession Platform'
Posted January 10, 2020
API’s new State of American Energy report illustrates how abundant U.S. natural gas and oil is empowering economic growth and opportunity across the country – and the potential harm to these benefits if fracking is banned, as some presidential candidates have promised to do.
The Washington Post’s Dino Grandoni has an analysis taking exception to the latter point, that banning hydraulic fracturing – the technology most responsible for launching the U.S. energy revolution – would seriously damage the U.S. economy, raise energy costs for American consumers and could likely trigger a recession at home and harm the global economy.
As an economist I would argue that an economic study isn’t needed to validate API’s point about a fracking ban. History shows what would happen if natural gas and oil production from the world’s leading producer was undercut by a fracking ban.
According to independent studies, a sudden and enduring return to oil with triple-digit prices is the likely risk.
We saw this as recently as late 2014, before burgeoning U.S. oil production broke OPEC’s stranglehold on global supply and won hard-earned market share. The U.S. emerged as the world’s top natural gas and oil producer, and natural gas and oil prices and price volatility decreased by about half after that.
Seminal global oil market events, such as the 1973 Arab oil embargo and the 1979 Iranian revolution, both took global oil supply offline and saw oil prices spike and trigger recessions.
And prior to the advent of U.S. shale production, oil supply outages in Libya and Nigeria routinely added a geopolitical risk premium that was thought to be a permanent fixture, until the financial crisis in 2008 and 2009. Oil prices climbed near $150 per barrel in June 2008 helped push the emerging crisis over the proverbial ledge.
Reasonable people can disagree about technical matters, but basic math usually isn’t arguable. A fracking ban would gut upstream resource development as well as massive recent and prospective capital-intensive investments spanning liquified natural gas (LNG), refining and petrochemical expansions and manufacturing.
Unfortunately, Grandoni misconstrued the scenario and instead made apples-to-oranges comparisons and focused narrowly on a subset of the industry’s intertwined activities.
Specifically, Grandoni quoted Harvard’s Jason Furman (from the previous administration) in suggesting that a 7.3 million job loss, asserted in API’s report, is a “ludicrous exaggeration” compared with economywide losses during the Great Recession.
There’s your faulty apples-to-oranges comparison. The Great Recession was a global financial crisis with an impact cushioned by unprecedented economic stimulus efforts and central bank coordination.
By contrast, a fracking ban would purposefully and unilaterally dismember one of the most fundamental industries to the U.S. and global economies.
In the U.S., 95% of new wells today are hydraulically fractured, so a fracking ban would cease substantially all drilling as it is performed today. It would destroy the root of the American natural gas and oil industry, which supports about 11 million U.S. jobs through direct, indirect and induced employment, and has provided the world with nearly all of the incremental oil supplies for the past couple of years.
America’s competitive advantages in energy, refining, petrochemicals and manufacturing would evaporate, and the U.S. would suddenly return to OPEC dependence and higher prices for crude oil, natural gas, ethane, propane and everything made from these commodities. It is plausible that a significant portion of jobs supported by the U.S. natural gas and oil industry could be lost, plus job gains that otherwise could be foregone.
Furthermore, the economic impact that API cited is based on macroeconomic modeling and therefore represents a scenario, but one based on official U.S. government data and the identical model and methodology employed the U.S. Energy Information Administration in its Annual Energy Outlook 2019 – the gold standard in the industry. This captures the economy-wide effects on prices and income from initial resource extraction and development all the way through the value chain to final consumption, investment and trade. More importantly, it also accounts for the economic response from the macroeconomy to the higher prices resulting from a fracking ban.
Whether we look to history or advanced modeling, intuitively the stakes for the U.S. are extremely high.
Endorsing a fracking ban is therefore tantamount to a platform advocating for an American recession with worldwide repercussions. That’s a losing proposition of global proportions.
About The Author
Dr. R. Dean Foreman is API’s chief economist, specializing in energy and global business. With a Ph.D. in economics from the University of Florida, he came to API from Saudi Aramco Strategy & Market Analysis in Dhahran, where he managed short-term market monitoring and the long-term oil demand outlook. Foreman has more than 20 years of industry experience in corporate strategic planning, forecasting, finance / risk management and regulatory policy at ExxonMobil, Talisman Energy and Sasol North America.
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