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No Bonanza from Cheap Oil
Keith R. Long, U. S. Geological Survey
Abstract: During the second half of 2014, oil prices fell by half after hovering around $105 per barrel for four years. Historically, an oil price decline of 30 percent or more would add 0.5 percent to world economic growth in the medium-term, with greater growth in oil-importing countries. It may be too soon to tell if history will repeat itself globally, but the United States cannot expect much benefit. We are no longer an oil-importing nation. The estimated $70 billion drop in oil industry investment since the oil price collapse has largely offset the estimated $120 billion in savings to consumers and corporations. Cost savings for corporations are apparently insufficient to overcome larger macroeconomic and policy trends that have suppressed investment to the point that overall labor productivity is decreasing. Consumers seem not to believe that low oil prices will last and remain skittish post-recession. Hence, they are more likely to reduce debt or increase savings than spend. Lower oil prices would normally reduce inflationary pressures, allowing the Federal Reserve to reduce interest rates and further boost economic growth. This is not possible with interest rates at near zero levels. Increased global economic growth coupled with lower input costs (oil as energy and as a feedstock) ought to increase exports for a number of domestic industries, such as petrochemicals. Global economic growth, however, is weakening and a 10 percent rise in the value of the dollar, due largely to the oil price collapse, offsets cost reductions from cheaper oil. Low oil prices are likely to persist. U.S. shale oil production has proven remarkably robust as operators find economies that were ignored during the recent boom. Application of similar oil production technologies to old world-class fields in the Permian Basin and elsewhere is adding to domestic production. Eventually, consumers and corporations should realize this and modest increases in growth may ensue. However, in an economy with declining labor productivity, record-low labor participation rates, double-digit increases in health care and education costs, regulatory uncertainty, and a host of other macroeconomic problems, a consumer and corporate-investment led economic boom is unlikely.
Bio: Keith Long studied geology at the University of California Santa Cruz and the University of Michigan before earning a Doctorate in Mineral Economics from the University of Arizona. He joined the Mineral Resource Program of the U.S. Geological Survey in 1988 to conduct mineral resource investigations in South America, principally in Bolivia. He turned to domestic duties in 1995, developing mineral deposit and mining cost models, and investigated the history of mining and milling operations in the Coeur d’Alene mining region, for which Keith received the John M. Townsley Award from the Mining History Association in 2002. In 2009, he published a re-estimation of Taylor’s Rule relating mineral reserves to mine capacity in Natural Resources Research, a journal he edited from 2010 to 2012. In 2010, he was lead author of Principal Deposits of Rare Earth Elements in the United States. His current research areas are critical minerals issues, life cycle assessment methodology, and integrated resource assessments.