No one saw it coming! In hindsight, a simple review of the supply/demand equation clearly foreshadowed a crisis in the making. The quiet advance of the U.S. as a top global producer of oil surprised the markets as well as economists (Chart 1).

Oil is a commodity and, by very nature, cyclical. The theory that shale discoveries and fracking could cause an energy renaissance in the U.S. has finally been realized (Chart 2).   How is this boom different and who will eventually emerge as the winners and losers?

Time to market is a marked difference of this cycle. Oil discoveries in the Gulf back in the 1980’s took 20 years from discovery until production. Oil in Alaska took 9 years  to  produce.    Current  oil  discoveries  are  being turned into production in only 5 years.  And even over the last five years, each subsequent well has been increasingly productive.  However, if the price of oil remains below $50 per barrel, one half of all oil projects will become unprofitable.

Because of these changing economics, some participants will be at risk.

• Employees in the energy field
  • Oil field workers (Chart 3)

    

  • Transportation workers
  • Large energy companies will downsize
• Regions that specialize in oil exploration and production (Chart 4)
  • Jobs and real estate will be under pressure

    

    • Texas
    • North Dakota
    • Montana and others
• Fixed income issuers
  • Oil exporting countries
  • Exploration and drilling businesses
  • Financial institutions providing business loans
• Fiscal stress for countries reliant on oil
  • Russia
  • Venezuela
  • Nigeria
  • Libya and others
• Environmentally friendly substitutes
  • Become uneconomical and unaffordable
  • Lose capital expenditures and governmental subsidies

However, on the bright side, winners abound when energy is cheap!

• Consumers (who are 2/3rds of GDP in the U.S.) have more discretionary income as gasoline prices fall and the cost of goods gets more affordable.
  • Larger automobiles
  • Trips, vacations, and recreation
  • Purchase of luxury, non-essential items
  • Cheaper imported goods
• Energy bills are lower for businesses and households
• Producer input prices are lower, spurring manufacturing growth

Prognosticators say that cheaper oil is a net positive for the global economy, but the risk-reward equation has a very slim margin of error. The fairly short lead time for oil exploration and production in the U.S. oil fields should serve to make the supply equation quicker to adjust to weak or strong oil prices. Oil will seek an equilibrium price as a balance is sought between supply and demand. It is in the global best interest to maintain a fair market price for oil. The U.S. wishes to be energy independent, so let us take advantage of this opportunity and build on our expertise in order to increase our country’s influence around the globe.

Chart 3. Total U.S. oil and gas rigs. Source: FRED

Chart 4. Major U.S. shale oil and gas production areas.