Wow, I had barely recommended repealing the laws that restrict United States oil exports as part of an overall ramping up of competition in global oil markets when news hit that the Saudis were cutting the price of oil shipped to the U.S.
The price of oil has been zigzagging downward since then — much to the benefit and delight of American motorists, who have seen gasoline prices fall and to the angst of oil producers as lower prices squeeze profit margins.
Some may think that the Saudis are targeting American producers by cutting the price of crude oil shipped to the States even as they raised their price to Asian markets where the supply/demand balance is more in the Saudis’ favor.
However, Stansberry and Associates resource analyst Matt Badiali points out the sour crude that the Saudis are shipping here doesn’t compete directly with the light sweet crude coming out of American shale.
The Saudis are competing with Canadian producers to whom, as Badiali shows, they have been losing market share.
Of course, there are multiple factors here which make predicting the long term problematic: How much longer can the Saudis maintain their rate of production?
How fast are the Canadians achieving economies of scale and advancing along the learning curve to reduce the cost of extracting oil from tar sands?
Can the Saudis make up in increased sales volume the profits that they lose as the price of oil declines?
What geopolitical events might throw a monkey wrench into the Saudis’ strategy?
Indeed, the Saudi decision to drive down oil prices in North America means that the future prospects for the economic viability of the Keystone project need to be reexamined.
President Obama has stubbornly refused to give the green light to Keystone. Wouldn’t it be ironic if, after squandering so much political capital on his obstructionist position, it turns out that market prices kill or continue to delay the project?
So, what now?
Should the Keystone Pipeline be built?
That’s not for me to say and, frankly, I don’t see the future clearly enough to know whether it will be economically viable in the coming years. Policy-wise, the president should simply get out of the way, call off his regulatory dogs, tell his green constituents to sit on it, and let entrepreneurs decide what risks they wish to incur. If they build it and lose money, well, it’s their money that’s being lost.
The oil market is working. We consumers — thus, society as a whole — are benefiting. In the competitive scramble to serve us, some producers will succeed while others fail.
We should be grateful for them all, winners and losers, for each one of them, in their attempt to earn profits by supplying our needs, has added to the competitive pressures that have pushed down oil prices. The cheaper oil gets, the more our prosperity will increase.
Dr. Mark W. Hendrickson
The Center for Vision and Values
