Seemingly overnight, gasoline prices have plunged. Regular unleaded is approaching $3 per gallon at my local Wawa. That’s the lowest price since just after the recession ended.
Since nothing makes American consumers happier than lower gasoline prices, they should be cheering now. The American energy story is entirely good news.
Pulling gasoline lower is a surprisingly sharp decline in global oil prices. Just a couple of months ago, a barrel of oil traded for well over $100 on global markets. Today, the price is closer to $80.
Slower economic growth in Europe, China, and elsewhere has crimped global demand for oil. More importantly, however, global supply is surging. American production is booming, making the United States once again the world’s largest oil producer.
Production is also up in some war-torn countries such as Libya and Iraq. Saudi Arabia, which has historically curtailed output when global prices slumped, is pumping lots of oil, fueling much speculation about the Saudi leaders’ motives.
Rumors suggest they might be trying to hurt the Muslim-extremist group ISIS, which is selling oil to finance its rampage across the Middle East. The Saudis might also be trying to pressure Russia to curb its aggression in Ukraine. A more far-fetched theory is that Saudi Arabia wants to short-circuit the U.S. fracking boom by making it unprofitable.
More likely the Saudis want to reestablish discipline in OPEC. The cartel has effectively fractured; most of its member states, especially those run by despots, are cheating on their production quotas. Bringing OPEC into line won’t be easy, however, and at best will take time. Oil prices are thus likely to remain low for the foreseeable future.
This is a boon to U.S. consumers. Every time the price of a gallon drops by a penny, consumers save $1.25 billion over the following year. Assuming prices stabilize near $3 per gallon, consumers will save $62.5 billion in 2015 – as much as Americans spent on movies, sporting events, and other live entertainment this year.
Consumers are already feeling much better. Confidence gauges have surged in recent weeks to levels last seen before the Great Recession. With unemployment falling quickly, debt burdens about as light as they have been in decades, and the stock market close to record highs, everything is lining up for a robust Christmas buying season.
The good energy news isn’t just about lower prices, moreover. America is again a global energy powerhouse. Shale-oil and natural-gas production are booming, helping make the nation energy independent.
Oil imports are at 20-year lows and falling quickly. Most of what we import comes from Canada. So much natural gas is being produced that we are trying to export it. Doing so will be difficult, however. The infrastructure needed to ship natural gas overseas is expensive, and laws written when there were lines at gas stations still restrict energy exports.
U.S. natural-gas prices are as low as anywhere in the world. Because natural gas fuels a growing share of the nation’s electric power plants, the cost of electricity is also low. Americans pay about half as much for natural gas and electricity as do the Chinese, and about one-fourth as much as consumers in Japan.
The prospect of cheaper energy is attracting global manufacturing back to the United States. This is especially true for the petrochemical and plastics industries that use energy intensively, but energy is important for almost all manufacturing activities.
Low natural-gas prices will provide an even bigger kick to the U.S. economy when we begin to use natural gas for transportation, particularly for trucking. Natural gas-powered trucks are common in other parts of the world. Holding back progress here is a lack of appropriate fueling stations. But smart, enterprising people are working on this problem, and likely to solve it.
Energy independence may also mean we can ask other nations to share the cost of keeping global energy supplies flowing. A large share of the U.S. defense budget now goes to securing those supplies. It stands to reason that countries such as China, India, and Japan, which also rely on this global network, should pay more to safeguard it.
To be sure, we can’t take our energy future for granted. Just one environmental calamity – an oil-laden train being derailed, fracking mistakes polluting large swaths of groundwater, or even fracking-related earth tremors _ could muck things up badly.
We also need to rethink how we tax energy producers. Their effective tax rate, after various tax breaks and loopholes, is among the lowest of any industry. This makes little sense given the potential environmental costs of oil and gas production.
These caveats aside, the U.S. energy outlook is bright. Given how important energy is to our economy, so too is the economic outlook.