The loudest socialist mouthpiece in the House is AOC. She is cheering the news of plummeting oil futures. Monday oil futures went below zero. That means oil producers are paying processors to take the oil. Demand worldwide has plunged in response to the coronavirus.
So let’s stop and think for a minute about what is happening. First, there is the situation with the coronavirus. The political suppression of the economy is devastating. How devastating? In New Hampshire, if we assume state tax revenue is a proxy for economic activity we are off more than 30%. Actually we are now approaching 40% reduction year over year.
The Democrats are rejoicing in this misery. They are happy because greatly reduced economic activity means less damage to the environment. Okay fine. But if 40% of the people cannot pay their rent or afford food; how’s that a good thing?
The Democrats are rejoicing in this misery. They are happy because the tax reductions that were scheduled to take effect are canceled. Okay fine. But, reduced taxes mean you have more money in your budget to pay bills. What’s more, the more money businesses have the more people they can afford to hire.
The Democrats are rejoicing in this misery. They are happy that government programs will no longer have funding for budgeted expenditures. That, to them means taxes must go up. Okay fine.
But, if we raise taxes who’s going to pay them. A huge portion of small businesses are gone or endangered. That means to support the same level of government there is a smaller base available to tax. In turn, that means the tax rates on the remaining businesses will have to become much higher. That, in turn, means the businesses become less competitive… which reduces tax revenue because they won’t sell as much.
The Democrats are rejoicing in this misery. They promise Big Government and infer Big Government will be egalitarian. It is to be relied on like a religion to take care of those who are reliant on the social safety net. The fact that Big Government has never been kinder and gentler in the past doesn’t seem to bother them.
Okay fine. But what if there is no more money available to borrow and the tax base is shrunk. What happens when the well runs dry? Think that’s an empty hypothetical? The U.S. Treasury is still holding weekly Treasury auctions. No one in the world is buying any of our debt… no one. We are going to test the hypothesis.
The oil patch
The Democrats are rejoicing in this misery. The energy sector, oil, in particular, is being crushed. We were energy-independent but we cannot continue to produce at current prices. This is costing the economy jobs. This is making us dependent on foreign, Russian, Saudi, Venezuelan oil production to keep our economy running. That damages our national security.
The Democrats are rejoicing in this misery. They are applauding low oil prices and low-interest rates. So why are those things good at the gas pump but bad overall? With the economic collapse, tens of millions of people are filing for unemployment. The consequence of the oil price collapse is it will bankrupt most if not every energy producer the entire oil industry.
The Democrats are rejoicing in this misery. Bankrupting our energy producers will mean higher prices at the pumps in years to come. Those will be price increases we will not be able to avoid or mitigate. We will be back to the days of the Carter administration with lines and rationing in addition to the price increases.
The Democrats are rejoicing in this misery. We have just become free and independent of the geopolitical constraints of foreign oil imports. This will put us back under the thumb of foreign oil producers. Do you really think they won’t make this hurt?
Russia and Saudi Arabia
The Democrats are rejoicing in this misery. Russia and Saudi Arabia are taking advantage of the coronavirus outbreak to screw and bankrupt the American oil industry. The Saudi’s have been a counterbalance to Iran in the Middle East. But they are not acting in our best interest. Yet, they rely on us for protection when they are attacked. What does this mean going forward?
The Democrats are rejoicing in this misery. Russia is our enemy. They would like nothing more than seeing the destruction of our oil industry. China is our enemy. They would like nothing more than to see us dependent on foreign oil. Both benefit if the petrodollar collapses. Who is harmed? The average American citizen, the taxpayer in America and those businesses doing business internationally that’s who is harmed.
The Democrats are rejoicing in this misery. America has had more wells oil drilled in it than the rest of the world combined. 95% of all shale oil production worldwide in the U.S. Production from shale is expensive because of the required drilling. In most oil-producing regions fracking is not required because of abundance through conventional means. Before fracking oil prices were close to $50/barrel.
Independents Vs. Big Oil
The Democrats are rejoicing in this misery. The innovation that brought forward production from shale was done by small independent producers. They are not integrated companies. The independents do not control the oil from the ground to the gas pump. They were nimble enough to use new technology. The small producers are the ones hurt first and damaged most.
The Democrats are rejoicing in this misery. Russia and the Saudi’s have decided to launch a market share war on America. America used to import about 12 million barrels per day. Post shale we have become a net exporter of a few hundred thousand barrels per day. This means the change is about $250 billion/year. It also has meant a big change in jobs.
The Democrats are rejoicing in this misery. Do we want to be energy independent or not? All policy flows from the answer to that question. It seems pretty apparent the Democrats want us to be dependent on the Saudi’s and the Russians for our energy needs.
Oil since the financial collapse
The Democrats are rejoicing in this misery. The demand destruction is a huge issue today. But it is a near term matter. The policy decision with respect to energy independence is a long term decision. Normal market demand for oil is about 100 million barrels per day. Today the world is using about 70 million barrels per day.
What this tells us is the economic impact on oil consumption from coronavirus has been 10 times greater than it was in the 2008 economic collapse. We have nor seen the tip of the iceberg of our economic problems. The Democrats are applauding this harm to you and me because they think it will benefit their political interests. Just let that sink in.
Predatory pricing… long term and short
The Democrats are rejoicing in this misery. The Democrats are siding with the Saudi’s and the Russians in bankrupting the American oil industry so that they will be the only players left in the game when this is done. Since shale, 8% of supply growth has come from America. We account for about 15% of total liquids supply which is roughly what we consume. The result has been a decline in prices by two thirds to OPEC plus nations.
The Democrats are rejoicing in this misery. So how long can the Saudi’s and Russia go with the low oil prices? The Saudi’s have depleted much of their sovereign wealth fund. They fund their entire government out of their oil revenues. Their breakeven cost is estimated at about $80 per barrel. Russia’s breakeven is about $42.50 per barrel. Both countries are engaged in predatory pricing. That is what the Democrat party is applauding, the use of predatory pricing being used against independent American oil producers.
The Democrats are rejoicing in this misery. Is drilling for oil in shale going to impact our water supply? The depth of the water table on average is 50’-300’ down. The fracking happens 8,000’-15,000’ down. The potential for such impacts is small because the fracking occurs about 1.5 to 3 miles of rock from drinking water. And, from a commonsense perspective, aren’t the oil industry people also dependent on the same drinking water are the rest of us?
The Democrats are rejoicing in this misery. They assert ending domestic oil and gas is good for the environment. But, will demand for oil and gas end? No. Only the place it comes from will change. People will still do those things that create pollution will stop. We will still drive cars, use plastics, fertilizer, etc… What we are going to do us to return to sending hundreds of billions of dollars overseas to countries who hate us. That’s what Democrats want to happen.
The Democrats are rejoicing in this misery. The biggest growth engine in jobs coming out of the 2008 economic collapse was the oil industry. Now the Democrats want to collapse that? So, what happens to all of the taxes paid by the oil industry? Where will this have impact? From California to New York there are small independent producers of oil and gas. Democrat leadership means something much different than its more conservative alternative. There’s an election coming. You’ve got a vote. Will you show up? Which alternative will you vote for?