What booms, must ultimately bust: How the boom/bust oil cycle works
Today we’re going to take a look at the boom/bust cycle infamous within the oil industry, and how it helps — and then hurts — state economies.
Let’s begin with a
Oil prices surge because of a lack of supply, making it profitable for oil companies to invest in drilling operations in oil-rich regions. This means jobs, lots of them, and huge increases in tax revenue for the states. In some places, like Alaska, tax income from oil production can make up as much as 90 percent of state revenue during boom periods. If it wasn’t obvious, this is really good for a state’s economy (temporarily). People have money to spend, public projects have funding, and oil states are on top of the world. Of course, when oil prices are high, fuel becomes more expensive, increasing the cost of driving as well as raising the price of anything that’s moved by ship, rail or truck — i.e. pretty much everything — hurting consumers. What’s more, this growth isn’t reliable or permanent. As more and more oil is produced due to increased investment, supply begins to outstrip demand, and then there is a
As oil prices fall because of a surplus of supply, it is no longer profitable for oil companies to invest in drilling for oil at the rate they were before. They start cutting jobs, and tax revenue from oil production starts to dry up as production falls. People are suddenly and abruptly out of work and no longer have money to spend; they have to go on unemployment, take a lesser job, or move. Governments scramble to plug budget holes, leading to cuts in schools, health care, roads, and other programs. It’s a painful time for anyone living in an oil state. The flip side of this, of course, is that people not living in oil states get to spend less on fuel and consumer goods.
Then, once oil prices get low enough that it becomes profitable to invest again, the painful boom and bust cycle begins anew.
Right now, we’re in the middle of a bust, leading to the loss of over 350,000 oil-sector jobs. And while there are some signs of a revival, there isn’t much hope that the next boom will be that significant or even come at all. Why?
But this oil bust could be different. A growing body of research says that changes in the international oil market, rapid advances in wind-and solar-powered generation and regulations aimed at curbing climate change may hold down the price of oil and natural gas for years or even a decade.
That means the fracking-fueled bonanza that pushed American oil production to levels not seen since the early 1970s may be remembered as more than just another high point for the states that depend on the oil industry. It could be the last oil boom.
Of course, often OPEC intercedes to give oil a boost: Last week the cartel voted to curb production by a mere 1.5 million barrels a day (the world needs about 90 million barrels a day). Brent crude, the international benchmark, has risen 18 percent the last four trading sessions, from $46.38 to $54.85, a 16-month high.
But the rally isn’t expected to last long, since the cut is only chipping away at a tremendous glut that has been building since 2014, Reuters reports. In any regard, because the price of oil can vary so wildly and quickly, there’s no telling what will happen. And that unpredictability is bad for everyone — the market, consumers, and oil states. The U.S. still imports much of its oil and has little control over prices, which are big reasons why we’re so vulnerable.
The truth is that booms and busts are a divisive cycle, painfully creating winners and losers. Fuel choice, which leads to competition and relative stability, is the only way to control prices for the long term. Click here for a post from my colleague Landon Hall on how investing in alternative sources of fuel will create a stable fuels market and a more-or-less permanent jobs boom.