The great irony of our day is that it may well be the oil industry – that unloved smudge on the environment – that rescues the Obama presidency.
With the impending chaos of Obamacare and unpleasant controversies swirling ever closer to the White House, President Obama’s biggest boost over the next three years will come from the enormous engine of the shale revolution. When the temporary gains from Fed Chairman Ben Bernanke’s quantitative easing begin to wane, the impact from lower energy costs and reduced spending on imported oil will begin to take hold. Obama will glide out of office on an oil slick that he resisted, but that will prove to be his legacy.
The damaging scandals circling the president have failed to dent Obama’s approval ratings. According to the latest CNN/ORC International poll, more than 50 percent of the country continues to think Mr. Obama is doing a good job.
Why is the president immune? At least for now, Americans care far more about home prices rising and the Dow Jones crossing 15,000 for the first time ever than they do about Oval Office misbehavior. We should not be surprised--it is, still, all about the economy.
The great question for the country – and the White House – is whether financial and housing markets will thrive once the Federal Reserve begins to back off its unprecedented quantitative easing program. Undoubtedly this will occur in the next couple of years – the time frame that could determine the legacy that has so obsessed Obama. While healthy earnings growth has contributed to the stock market gains, companies have signaled concern over slow revenue increases. Demand growth has simply not materialized.
What has materialized is a dramatic reversal in our energy fortunes. The explosion of natural gas resources available because of new drilling and fracking techniques has driven prices lower for U.S. consumers, and opened up meaningful export opportunities. The Department of Energy has now given approval to two projects which will export LNG, ending a stalemate on the controversial undertakings. Environmentalists and domestic natural gas consumers like chemical companies have opposed allowing gas exports for fear of higher production-related emissions and the threat of higher gas prices, respectively. However, the Obama administration was persuaded by the greatly expanded supply outlook, and the potential in export revenues.
Oil output, also benefiting from greater access to shale resources, has turned around as well, with a long-term decline reversed during Obama’s time in office. In 2008, production in the U.S. amounted to 5 million barrels per day; last year it was 6.5 m/b/d.
Higher oil and gas output not only improves our balance of payments, but also provides a powerful competitive weapon for U.S. industry – lower energy costs. Herman Van Rompuy, President of the European Council, noted at a recent summit that “Energy prices for industry [in Europe] have gone up by 27 percent in real terms between 2005 and early 2012, more than in most other industrialised economies.” Further, he pointed out that “Just last year, industry gas prices in the European Union were four times higher than in America. Thanks to its new "energy boom'" the United States is set to become a net gas exporter.” At the same time, the continent is growing ever more dependent on energy imports; by 2035, Europe will import more than 80 percent of its oil and gas.
The IEA World Energy Outlook reported that industrial fuel oil in Denmark, for instance, cost companies $973 per ton last year in the first quarter, while the U.S. price was $730. Japan, another player on the world export stage, paid an even higher price -- $1,057 per ton, as did Korea at $1,056. Natural gas prices were even more skewed; the U.S. industrial price in 2011 was $17 per megawatt hour compared to $36 in Belgium and $51 in France. Though energy is only one input cost, the advantage to U.S. producers is significant, and will only widen as the shale revolution brings more production online.
This is a huge win for the U.S., and for Mr. Obama, and it’s just beginning. In its most recent oil update, the Energy Information Agency predicted that “Production will rise from an average of 7.1 million b/d in the first quarter of 2013 to 8.5 million b/d in the fourth quarter of 2014.” The impact is profound; the EIA reports “Pipelines like Seaway that were once used to carry imported oil up from Gulf Coast ports to reach Midwest refiners have been reversed and are moving inland crude oil down to the Gulf, and their capacity is being dramatically expanded.” In another report, the EIA predicted the U.S. would become a net exporter of natural gas by 2019.
President Obama is not responsible for the dynamic improvement in our energy fortunes. Beginning in 2009, the administration threw up endless roadblocks to energy progress, including withdrawing significant numbers of offered leases in Utah and Montana, toughening lease terms, banning, delaying and slow-walking offshore permits (provoking a court judgment that the Interior Department was in contempt of court), and of course nixing the Keystone Pipeline. In 2009, the U.S. produced 1.7 million barrels per day on federal lands; by 2012 that had dropped to 1.6 mb/d. The gains have come from private leases.
Not only has the Obama administration held up expanded drilling, the President has repeatedly called for significantly higher taxes on oil and gas producers. In the most recent budget, proposed changes would strip the industry of $41 billion in various tax preferences and incentives over the next decade. Oil and gas company prospects would likely not be set back significantly by such measures. Still, it’s a funny way to say “thank you.”