Oil and Fracking and Petroleum, Oh My! A Macroeconomic Perspective on Energy Production

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Power. Electricity. Automobiles. Air travel. Supply systems. As with many human products and institutions that play the biggest role in human life, the world’s dependence on oil production and trade is fairly recent. This “dawn of the oil age”, as the Economist puts it (2013), caused the expansion of oil into virtually every aspect of human life, sparking new trends and focus in economic, commercial, political, and security-related fields. Ever since it began to be produced in the mass-market in the late part of the 19th century, the demand for oil has continued to rise as humanity becomes increasingly dependent on automation and energy production.

As previously mentioned, oil production (or lack thereof) now affects three issues directly related to contemporary macroeconomic issues: economic, commercial, and geopolitical. The economic effects are largely related to state intervention and policies. The commercial effects are related to the practices of oil and petroleum producing companies. Finally, the geopolitical effects are related to the power relations between nation-states, relative to their stake in the future of oil production. Of course, each of these major individual issues is affected by a wide range of macroeconomic factors, such as supply and demand, employment, ecological systems, Gross Domestic Product, and technological processes. Each of the major effects will be looked at (in brief), with the macroeconomic factors considered when relevant.

First, the effects of oil production and international distribution on the economy (both global and in the United States) are perhaps the easiest to examine. Essentially, oil production is a volatile trade (no pun intended), dependent on too many outside variables to be stable. As Jeremy Warner assesses in his column with the Telegraph, the rising price of oil is both “deflationary and inflationary” which makes for a dangerous economic mix (2013). In other words, if the price of oil rises too high, it will subsequently (and essentially) depress the economy but add to the economy’s inflation at the same time. While Warner recognizes that this is often solved by a weakened demand, he also states that a modern twist of events – faster-growing markets and a more manipulative OPEC – has “undermined the old rules”, so to speak, making a weakened demand less of a driving force in the market than it should be in pure supply and demand economics.

Of course, the shift in more recent years toward the development and extrapolation of shale and fracking in the United States has offset this imbalance. In CitiGroup’s “Energy 2020” report, researchers report that the results of shale development in the past decade “have been stunning” (Adelmann, 2013). In terms of numbers, natural gas use grew by 46% and over two million barrels of crude oil every day, which, according to CitiGroup, has all but ended “coal’s century-long domination.” The effect of this is that North American energy output should “start to have a tangible effect…on global prices” (Adelmann, 2013). This also affects the United States as a global power.

Second, the macroeconomic issue of oil and energy must concern itself with the practice of capitalism and commercialism. First and foremost in this consideration is employment in the United States. The expansion of oil and natural gas production in the United States (especially Texas) means an upturn in employment rates in the state. In Ed Crooks’ Financial Times article, he notes that the Permian (an oil-producing region in West Texas) is “one of the centers of the onshore oil boom that has lifted U.S. production almost 50 percent over the past five years” (2013). While this has great implications for the United States as a whole, a boom in production also means a boom in domestic employment. Another aspect of the commercial effect of oil production is that the world’s dependence on the product is completely interwoven with other technological advances. As energy and production technologies outside of coal and oil begin to take more of a market share, the demand for oil has wavered. In other words, it is possible that oil demand has already peaked. As noted by the Economist, both the depths of fracking and automotive technology threaten oil’s place as a market driver. It may take a while, but these changes in technology may begin to take their toll on the macroeconomic equilibrium of oil production. Whether this is a good development or a bad turn for the global market is another question altogether.

Finally, and perhaps most interestingly, is the geopolitical aspect of oil production (which, in its own right, has a great influence on macroeconomics). This effect is relative to the stake that each state has in energy production – as can be seen by returning to the fracking issue. Wu Sike, a former Chinese envoy to the Middle East, said of fracking: “The United States will become less and less reliant on Middle Eastern oil until this reliance finally ends” (Adelmann, 2013). Sike also mentioned that OPEC would diminish in importance as well, given the lack of dependence. This would dramatically shift both Middle Eastern players’ stakes in maintaining good relations with the United States, and the United States' commitment to aid in the Middle East. As Warner notes, “the energy ‘trilemma’ – balancing the priorities of affordability, security and emission targets – no longer exists” (2013). Many Middle Eastern states, such as Saudi Arabia, have staked their security and autonomy on their oil production. As the Economist states, Saudi Arabia’s ability to avoid the recent Arab Spring my dampen if “the oil flows into the kingdom’s coffers less readily.” Thus, oil production itself has a great hold over regional and global powers.

Works Cited

Adelmann, Bob. 05 December 2013. “Saudi Texas is Changing the World’s Economic and Political Landscape.” The New American. Accessed: http://www.thenewamerican.com/economy/markets/item/17100-saudi-texas-is-changing-the-world-s-economic-and-political-landscape

Crooks, Ed. 07 July 2013. “Texas Heartland Leads the US Oil Revival.” Financial Times. Accessed: http://www.ft.com/cms/s/0/36f6252c-e58f-11e2-8d0b-00144feabdc0.html

Economist.com. 03 August 2013. “Worlds Thirst for Oil Could be Nearing Peak.” The Economist. Accessed: http://www.economist.com/news/leaders/21582516-worlds-thirst-oil-could-be-nearing-peak-bad-news-producers-excellent

Warner, Jeremy. 21 November 2013. “Oil is Both the Lifeblood and the Poison of the Global Economy.” Accessed: http://www.telegraph.co.uk/finance/oilprices/10465340/Oil-is-both-the-lifeblood-and-the-poison-of-the-global-economy.html