The views expressed by contributors are their own and not the view of The Hill

The oil and gas balancing act

Oil prices in the United States have been in steady decline for months. Driven by a number of factors-increased domestic supply, slowing growth in China and a stronger US dollar-prices here at home continued a 17 percent slide in the first two weeks of the New Year and have bounced around since then.

Oil hasn’t traded below $30 per barrel since 2003, and some experts predict prices could fall as low as $10 per barrel-has had a range of impacts on the economy. While the shift has been mostly good for consumers, it has put some states, especially those dependent on traditional energy production like Alaska, in a difficult position.

{mosads}Cheaper fuels have delivered savings for consumers and businesses, in the range of several hundred billion dollars since prices topped $100 per barrel just last summer. Gasoline, diesel and heating oil account for about two-thirds of the 20 million barrels of oil consumed in the United States every day. As those prices have fallen, most Americans have reaped the benefits at the pump or on their meters.

Lower prices have helped to cut the trade deficit by reducing the cost of imported oil, as greater domestic production has alleviated reliance on foreign suppliers. The Dallas Federal Reserve estimates the drop in crude prices could add about half a percent to U.S. GDP.

But lower prices haven’t been a universal godsend. In fact, declines over the past year have contradicted the maxim that when oil prices fall, economic growth ensues. The full gains of lower prices remain to be seen, and in many places-especially energy producing areas-lower prices have put a strain on the economy. More broadly, depressed prices could risk the long-term sustainability of a robust energy portfolio.

Energy development requires significant upfront capital outlays and a long planning horizon. As prices remain below equilibrium, producers lack the incentive to take on new projects-or to gamble that they might rebound. Already, energy producers have scaled back production and investment amid plummeting prices. The U.S. Energy Information Administration (EIA) estimates U.S. production declined by 80,000 barrels per day in December alone.

As a result, policymakers seeking to “do something” face a difficult balancing act, sustaining long-term production and securing the benefits of affordable prices-especially in states whose economy relies on oil and gas production. States like Texas and North Dakota will likely face a slowdown, but are well diversified and have put away “rainy day” funds to whether the storm.

In Ohio, lawmakers including Gov. John Kasich (R) have thought of raising taxes on energy producers. Coupled with very low oil prices, that could slash energy production. Policy-makers should be cautious about the long-run impact of undercutting energy production on growth throughout the economy.

Alaska, which relied on oil production taxes for as much as 90 percent of government revenues in the past, is in a much worse position. Production has been in steady decline for decades. With oil prices plummeting over the past year, the state faces a $5 billion debt and a more than $4 billion deficit. The situation is so dire in fact that even one coalition, led by the state’s telecommunications monopoly GCI, appears to be pulling out all stops to push a draining of the state’s sacred Permanent Fund to close the gap. Turning to the fund established to provide future Alaskans with some benefits from its natural resource development rather than making the tough cuts and spending choices – such as putting in jeopardy many of the millions of dollars in contracts the state has with GCI – seems like a short-sighted, greedy endeavor from its largest broadband and telecommunications provider.

This self-serving end run by GCI is especially true given Gov. Bill Walker (I) has suggested increasing taxes on oil production and even a tax on gas reserves-the resources left in the ground. Pursuing such punitive taxes on energy producers threatens to walk Alaska even further into a corner. Such action could accelerate job losses and exacerbate the economic downturn. The state has already lost 1,000 industry jobs as companies deferred or cancelled exploration opportunities. Last year was the first year of job losses since 2009, and only the second year of losses since 1987.

Fortunately, Alaska is a resource-rich state, and lawmakers have several policy levers at their disposal. No lever greater, perhaps, than the wealth of natural gas reserves in the North Bay, which accessed prudently could reinvigorate in-state energy production. In fact, even as record-low oil prices have mothballed similarly sized projects, the state and its partners continue to make progress on a massive $65-billion liquefied natural gas project. But as oil prices look to remain low, lawmakers should secure these opportunities while they can-not throw them into turmoil by restructuring tax plans.

Low oil prices have long served as a cause for celebration for consumers and policymakers alike. But the domestic energy renaissance over the past decade has transformed the way energy prices affect the economy, and state leaders must be judicious in a balancing the long-term implications against the immediate benefits for consumers.

Rafuse is a former White House energy adviser and current principal of the Rafuse Organization.


More Energy & Environment at The Hill News

See All

Most Popular

Load more


See all Video