March 30, 2012 1 Comment
Economist and oil expert Philip Verleger recently discussed America’s current energy boom and its implications at the Peterson Institute for International Economics. He is currently a private consultant on energy issues and a former senior economist with the Council of Economic Advisers and the Treasury Department during the Carter Administration. As an oil and energy analyst for almost 40 years, he says he has never seen anything like the current energy boom that the United States is currently enjoying, emphasizing that the U.S. could soon be a net oil and energy exporter. Verleger is not the only one catching on to this development. In late March, a major article was published in The New York Times highlighting these changing circumstances.
Verleger now recognizes that the U.S. will be a low-cost producer of energy well into the future, projecting that domestic production will have a “50, 70, maybe 80% cost advantage,” subsequently enticing companies to return production back to the United States. In this new environment, every increase in global prices will now be a competitive advantage for U.S. and its exports moving forward, providing a base for stronger economic growth than many of the other industrialized countries.
For years, many administrations had sought the “high-cost solutions” to energy independence driven by major investments in alternatives, but now we finally have the “low-cost solutions.” In looking at the causes behind this change, he states that major oil companies left the United States and abandoned production, but reduced costs and size of computers allowed smaller companies to compete technologically and develop smaller fields untouched by large companies. Another contributor was the development of the energy futures markets that stabilized prices and built inventories, enabling investment growth. Verleger noted the key role of regulators that have mandated fuel economy improvements, the use of ethanol in gasoline, and other environmental regulations. The auto industry itself has also been a factor, changing business models in the wake of its 2009 “near death experience.” Further contributing to price declines, domestic gasoline demand has been falling between “5 and 6% year over year” as well.
Looking to the future, Verleger is quite optimistic. He believes these circumstances lay the foundation for a U.S. competitive advantage that will last for at least 10 to 15 years, maybe even 30 years. He predicts that this phenomenon will add one-half to a full percentage point to the U.S. GDP growth rate through both consumption and investment. However, he is still cautious on a few fronts. First, he worries that major oil companies will be unable to compete in this low-cost, low-price environment. Second, we must significantly improve our infrastructure. Finally, he doesn’t think the U.S. will become protectionist of this advantage through export quotas, but he says that the temptation will be there and will be difficult to fight. Nevertheless, these changes are likely to strengthen the dollar and trade balances, help to control debt and deficits, and enhance overall economic competitiveness.
Posted by: Brian Gowen