Oil Prices Surge, but That’s Fine for Some US Interest Groups

By: Ryan McMaken

Oil prices surged Tuesday night following the Iranian government’s missile attack launched in response to the US US’s killing of Iranian general Qassem Soleimani and Iraqi militia commander Abu Mahdi al-Muhandis.

According to CNBC , U.S. West Texas Intermediate (WTI) crude futures surged 4.5%, or $2.83, to $65.53, its highest level since April.

In dollars per barrel (WTI), the oil price has hovered around 55 dollars per barrel over the past year, with the exception of a spike above 60 dollars per barrel in May 2019.

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In inflation-adjusted terms, oil prices ended 2019 under 60 dollars per barrel, and remained well below oil prices experienced from 2005 to 2014 (WTI):

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The 2005 surge was due in part to the US’s 2003 invasion of Iraq. The oil price exceeded 150 dollars per barrel in mid-2008, and remained above 100 dollars per barrel during much of the period from 2011 to 2014.

However, global oil prices have fallen significantly as US crude production surged over the past decade thanks to fracking technology. The energy economy was fundamentally changed in the US by this shift, with the US becoming a net oil exporter over the past decade. According to an article last month in the Wall Street Journal, this was unexpected in an age when environmentalists and other lectured much of the public on “peak oil” and how energy was about to become outlandishly expensive. The WSJ notes:

At the beginning of the decade, energy independence was still a joke for late-night television comedians,” says author Daniel Yergin, who is vice chairman at IHS Markit. “Turn around a decade later, and we’re here.”

So, when US foreign policy produced a shock due to its endless military interventions in the region, this meant a lot of pain for the taxpayers and voters in terms of energy prices. But, in the past ten years:

The added oil production changed the relationship between crude prices and the U.S. economy. Whereas higher oil prices were once an unequivocal drag on the country’s economy, the impact is now more mixed. More-expensive crude still hurts consumers, but it is an economic boon to the country’s revived oil-producing regions, partially offsetting the impacts.

“Oil prices go up—Texas wins, North Dakota wins, New Mexico, Oklahoma,” says University of Chicago economist Ryan Kellogg.

If oil prices remain at a sustained high due to a war with Iran, this would mean a higher cost of living for most Americans, but it could help certain regions and populations within the US. Oil-producing states like Texas and Oklahoma — states that just happen to contain many of the current administration’s core supporters — would benefit.

By pointing this out, I’m not claiming President Trump is deliberately trying to drive up oil prices to benefit certain constituents. But the current domestic political realities do mean the president is unlikely to suffer as much from high oil prices as he might have in previous decades.

Moreover, many of the downsides of higher oil prices will remain unseen by the public.

For example, fracking requires a substantial amount of resources to be profitable, including water, manpower, and financing.

Indeed, fracking is expensive to the point that many investors have begun to doubt its profitability in recent years. This, in turn, has led to cutbacks and layoffs.

While that’s a bad thing for those employed specifically in that industry, a decline in investment and resource allocation devoted to fracking means the cost of financing, water, and manpower for other industries goes down, meaning other industries could expand.

If oil prices go back up, we’ll likely hear about how this is leading to job gains in the energy economy. But the downside of that is significant for other industries. Naturally, rising energy prices mean, well, higher energy prices for businesses. But it will also mean higher prices for all those factors that go into oil production in the US. War-driven increases in energy prices are likely to generally drive up the cost of doing business for many business owners in general.

This, of course, is likely to be in addition to the hundreds of billions — or possibly trillions of dollars — necessary to prosecute yet another Middle Eastern war.

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