Since June 2014, the price of oil has dropped from over $110 per barrel to below $60 per barrel. This is great news for consumers, as well as industries that rely on oil products. Some, however, worry that the major reduction in oil prices will reduce the search for new oil sources, shut down some of the fields relying on hydraulic fracturing (fracking) and reduce state and local government revenues in oil-producing states.

Saudi Arabia and U.S. environmentalists would be happy to see U.S. oil producers cut back production in our higher-cost oil fields. The real irony here is the alignment of Saudi princes worried about increasing U.S. production and environmentalists who want to eliminate fracking. The difference lies in their attack methods. While the Saudis are attempting to use their market power to increase supply and drop oil prices, environmentalists are attempting to use government regulations to stop fracking, thereby making some U.S. oil too costly to produce.


Saudi Arabia recently decided not to cut oil production; in fact, they announced they would maintain market share, even if prices continue to drop. If a long-term period of low oil prices causes some U.S. oil fields to shut down, the Saudis and the rest of OPEC could regain a bit of the power they once had.

Contrast this with the efforts of environmentalists. By applying pressures that increase costs and delays at every step of the oil production process, they hope to make oil and gas extraction less profitable, paving the way for renewables that currently rely on government subsidies and tax breaks to even be viable. As a result of the difficulty of obtaining permits and approval for new pipelines, environmentalists have forced oil producers into using railroad tankers to ship their oil, a method that is both more dangerous and more costly than traditional pipelines. This is worse for both the economy and the environment.

The U.S. oil industry will be able to adjust to lower prices, as there is a lot of room to become more efficient. The price of oil is determined not just by how much it costs to get it out of the ground, but also by the cost of doing business. The business side is where the focus will come as producers seek discounts from suppliers and shippers. They are also likely to cut employee pay. As Cyrus Sanati, writing for Fortune, states, "welders who were making $135,000 a year will probably see a pay cut, while the administrative staff back at headquarters will probably miss out on that fat bonus check they have come to rely on. Rig workers and engineers will see their pay and benefits slashed as well. Anyone who complains will be sent to Alaska or somewhere even worse than Western North Dakota in the winter, like Siberia (seriously)."

Adjusting to political pressures will be more difficult than adjusting to changes in price-per-barrel. For example, environmentalists are making the distribution of oil more difficult. While new U.S. oil production has expanded, pipeline capacity has not. Environmentalists have opposed the not only the long-delayed Keystone XL pipeline, but are attempting to block a pipeline project that would connect North Dakota to the Great Lakes, and have succeeded in blocking a natural gas pipeline project in New Jersey.

Ultimately, this demonstrates the difference between using markets and using government to compete. Foreign oil producers are using market forces to compete, which will result in a more efficient U.S. oil industry. In contrast, environmentalists are attempting to use regulations to that are neither optimal for business, nor the environment.

Simmons, Ph.D., is director of the Institute for Political Economy and professor of political economy at Utah State University. He also serves as president of Strata Policy, a public policy think tank headquartered in Logan, Utah. Grant Patty, a student research associate at Strata, contributed to this article.