Economic Prosperity through Free Market Energy Abundance
Presentation by Dr. Vance Ginn at the Philadelphia Society meeting in Charlotte, NC
April 2, 2016
As the U.S. presidential election draws closer, politicians and voters are considering different ways to reignite a depressed economy and labor market during a historically weak economic recovery. At the heart of this is a debate between extractive, or progressive, institutions that forcefully redistribute resources and inclusive, or free market, institutions that allow individuals to satisfy their own desires through voluntary transactions.
The U.S. was once the envy of the world as it held the bronze prize in economic freedom in 2000, according to the Economic Freedom of the World Index published by the Fraser Institute. After years of government intervention in the economy and our daily lives, this ranking has fallen to 16th behind Taiwan, resulting in lackluster economic growth and job creation.
This decline precipitated from policies attempting to stabilize the economy through unprecedented fiscal and monetary actions. In fact, the current recovery looks to be one of the weakest on record with average annual growth of only 2.1 percent with no relief in sight. The direction of public policy must radically change.
Federal spending has increased by 27 percent since the fourth quarter of 2008, when the financial crisis took its greatest toll. This spending included bailing out banks and an almost trillion-dollar stimulus package contributed to an almost 80 percent increase in the national debt to $19 trillion. This debt now exceeds all of the country’s economic output. Though the sequester recently restrained spending, it has expired and didn’t correct the massive increase beforehand.
In December 2008, the Federal Reserve took historic action by lowering the federal funds rate to the range of zero to 0.25 percent and multiple rounds of bond-buying programs called quantitative easing. These actions were primarily intended to keep interest rates low to stimulate the economy.
A common benchmark for the direction of the federal funds rate is the Taylor rule, named after the Stanford economist John Taylor, that calculates the rate based on economic measures. The rule indicates that the Fed left the rate too low for too long during the mid-2000s, contributing to the housing market boom and bust, and has now left it lower than it should have been since 2010—with the current calculated rate of around two percent. After the previous lessons of failed policies, the Fed would be wise to return to a more rules-based approach that misallocates fewer resources.
Supporters of these policies cheer the drop in the unemployment rate from 10 percent in October 2009 to 5 percent in March 2016. But this measure misses the large number of people who have dropped out of the labor force and those working part time but would like a full-time job, which when added to the total unemployed brings the current underutilization rate to near 10 percent.
Collectively, these policies have misdiagnosed the U.S. economy. There is less economic activity with fewer dollars in the private sector due to higher taxes, more government debt, and more dollars flowing to unsustainable projects from excessive monetary easing. It’s no wonder that the U.S. has dropped so far in its ranking of economic freedom and Americans have been left to suffer.
Fortunately, the system of federalism provides an opportunity for a laboratory of state competition within an umbrella of federal policies. In search of a more free market model that would reward risk-taking and entrepreneurial activity, I recently published the paper “A Labor Market Comparison” at the Foundation’s website www.texaspolicy.com comparing economic freedom and labor market measures among the largest states—California, Texas, Florida, and New York—and U.S. averages during the last 15 years.
Ranking third in economic freedom and having the best labor market results compared with these largest states, Texas acts as a model. This high ranking isn’t an accident as Texas has kept taxes low, never enacted a personal income tax, and passed sensible regulations. These factors combined define the Texas model.
This model helped support the creation of 73 percent of all new nonfarm jobs in the U.S. from January 2000 to December 2014. Although critics often shrug these off as low-paying jobs, the inflation-adjusted private sector pay has been 67 percent higher than the U.S. average during that period with many more jobs added in high wage jobs than low wage jobs in the state and compared with the rest of the U.S.
The progressive policy prescriptions in D.C. and California continue to fail, especially regarding energy policy, which is what I’ve been asked to discuss today. These failures include the overbearing EPA, the lack of approval regarding the Keystone XL Pipeline, funding of uneconomical forms of energy, and the overall war by progressives on fossil fuels. Continuing down this path is one that will make Americans poorer, less productive, and more dependent on the government, which could be part of the progressive plan.
To renew the American dream, presidential candidates should consider similar free market measures taken by some states, particularly those in Texas. By providing inclusive institutions that allow free markets to work and support prosperity rather than extractive ones that redistribute resources and hinder progress, the American Dream that’s alive and well in Texas can be available for Americans nationwide.
Free Market Energy Policy
The world’s energy landscape has radically changed within the last decade because of surging production of oil and natural gas in the U.S. Unimaginable not too long ago, the U.S. is now the world’s largest producer of petroleum and related liquid fuels. More than three-fourths of the increased global oil production in the last decade is from domestic oil fields, contributing to a drop in our oil imports by roughly 60 percent since 2007.
This sea change is the achievement of a mix of innovative technologies, known collectively as hydraulic fracturing, applied by small and independent oil companies in multiple states. The shale revolution has been so successful that it has produced a large surplus of crude oil. The Energy Information Administration forecasts that there could be as much as 3.2 billion barrels of global oil inventory by the end of 2016. There’s been so much oil produced in the U.S. that there are barrels of oil parked in tankers in the Gulf of Mexico and in train cars until it’s more profitable to sell.
For our country to benefit from the colossal energy wealth now at our fingertips, the end of the antiquated 40-year old oil export ban starting this year is a step in the right direction. Tankers have now exported oil to other countries at an initially slow pace, but this is likely to pick-up as oil contracts run out for other countries and those countries find it in their best interest to purchase crude at a discount based on the West Texas Intermediate crude oil price.
Although this step provides a positive path in the energy arena regarding a source of energy that is portable, dependable, and affordable, there’s much more to do. Unfortunately, the Obama administration and many states have taken it upon themselves to make it more difficult to produce fossil fuels as renewables are propped up as a savior. This approach, if taken to its logical conclusion, will fail, as has been the case in Europe. We must rethink how we produce energy including how we can better allow free markets to allocate resources most efficiently rather than the current path of government manipulation without complete knowledge. This path towards greater dependence on free markets is one that will provide a brighter and more prosperous future.
Energy Revolution from Entrepreneurial Activity
The abundance of energy, especially fossil fuels, has transformed the world, particularly since the Industrial Revolution, helping bring more people out of poverty faster than in any other time in recorded history.
Economics is the study of human action and interaction whereby scarce resources are used to satisfy individual desires. Entrepreneurs are a vital part of this process in satisfying our desires as their ingenuity transforms markets into something very few thought possible. The shale boom is a terrific story of economic success.
Entrepreneurs helped create an environment conducive for the shale boom to bless us with abundant, affordable, and portable fossil fuels that provide efficient energy to satisfy our desires on a daily basis. Even still, with many of the cutting-edge fracking processes coming to fruition in the early 1980s, the price of oil plummeted during that decade making it not profitable to use these, at the time, expensive drilling techniques.
Things began to change during the 2000s. Not only did the techniques become economical, as entrepreneurs continued to work to bring down the cost of fracking, but also the price of oil and natural gas were such that it was profitable to frack.
The steady climb of oil prices during the 2000s, particularly in late 2007 and 2008 when the price of WTI hovered around $140 per barrel, there was plenty of profit motive using these more expensive fracking methods. Natural gas production that includes gross withdrawals and production took off around that time with production increasing by 31 percent from January 2008 to August 2015. Natural gas production was really the first round of the shale boom.
That didn’t quite transfer to an increase in oil production as the price of oil plummeted during the Great Recession to a low of about $35 per barrel in early 2009. It wasn’t until around the Arab Spring in early 2011 when oil prices recovered and were topping $90 per barrel and then reaching above $100 per barrel in March 2011.
Since then until the latest EIA data in December 2015, oil production per day is up 65 percent to 9.3 million barrels, which remains near the record high in late 1970 of 10 million barrels per day and the latest high of 9.6 million barrels per day in April 2015. This is in spite of the substantial drop in oil prices, showing the high level of efficiency of those wells online.
Texas has been a major contributor to this shale boom. Oil production per day in Texas is up 150 percent to 3.3 million barrels since March 2011 to December 2015, contributing to 55 percent of the increase in U.S. oil production during this period. Again, despite the drop in oil prices, oil production so far has not fallen off a cliff as those efficient drilling rigs remain in operation with a drop of 304,000 barrels per day since the record high in March 2015 of 3.6 million barrels.
It’s important to note that this drilling activity has been a bright spot in an otherwise dismal economic recovery. The U.S. labor force participation rate remains near lows not seen since the 1970s, but let’s somehow cheer the 5 percent unemployment rate—even though the more realistic underutilization rate sits at near 10 percent. The push to end the production of fossil fuels by the Obama administration is a push to end much of the prosperity that’s been created during the last decade.
Consider total civilian employment since the Great Recession started in December 2007. Texas has added 1.6 million new jobs while the rest of the U.S. has added 3.2 million. In other words, Texas has created 37 percent of all new civilian jobs in the last eight-plus years. The rest of the U.S. didn’t turn positive from massive job losses until January 2015 and didn’t surpass Texas until November of last year. Of course, these have not all been oil and gas jobs as Texas is a highly diversified economy with less than 3 percent of the labor force employed directly related to the oil and gas sector and less than 15 percent of the entire real economy. It was 5 percent and 21 percent, respectively, in the 1980s.
Texas has certainly felt a pinch from the lower oil prices as real GDP increased by less than half of one percent in the second and third quarters of 2015, contributing to slower annual job creation of just 1.4 percent. There have been almost 100,000 combined job losses in the manufacturing and mining sectors during the last twelve months through February. However, Texas has added nonfarm jobs in 64 of the last 65 months and the 4.4 percent unemployment has been at or below the U.S. average for 110 consecutive months.
By keeping a high level of economic freedom, which Texas ranks third in the recent Economic Freedom of North America report by the Fraser Institute, Texas will continue to be able to weather this challenge and others in the future. This is something that those in other states and D.C. should try to emulate. By remaining fiscally sound, Texas families and small businesses will continue to prosper.
What’s Holding the U.S. Back from Reaching Its Full Energy Potential?
The solution for a more prosperous nation is to facilitate the ingenuity of entrepreneurs and let states have more discretion over what may work best there instead of a one-size-fits-all approach that fits none. Entrepreneurial activity and free markets, after all, is what led to the shale boom, and other forms of advancement throughout human history. So what are the steps that are necessary to create this prosperous and energy rich future for America?
The first was taken at the end of 2015, which was to allow exports of crude oil. As noted previously, this may take some time to reap major benefits, but the marginal benefits of this are likely substantial. There are already huge construction projects taking place at the port in Corpus Christi, Texas, where the first tankers shipped, to export more oil and liquefied natural gas.
Policies made on faulty science and the lack of looking at the true costs of EPA regulations are widely viewed as preventing the economic recovery that Americans want. A better solution could certainly be private regulation, end of the EPA, and a greater focus on regulation at the state level, but this will not happen overnight.
With that in mind, we should consider the following in the meantime: allowing drilling on
federal lands; building more refineries; ending all subsidies for energy sources; approving construction of pipelines to build a robust national network of pipelines; reducing the EPA’s overreach by letting states do what works best for them, building more nuclear power plants, and ending state and federal renewable energy standards.
The best path forward for economic growth and prosperity is for the government to get out of the way, especially when it’s costly for Americans, as in the energy sector.
It’s truly remarkable that the Malthusian argument that society will one day return to a level of subsistence as the population grows hasn’t held true through the power of entrepreneurs to innovate. Indeed, ‘peak oil’ and ‘peak gas’ concerns have been waylaid by reality. Therefore, if we do not produce it here, production will happen elsewhere, many times in places that have worse production techniques to provide a safe, pollution-free environment and in places that aren’t friendly with us—leading to less peace and prosperity.
By following these solutions and others that allow free markets to lead the way instead of governments, the American Dream can once again seem not so far out of reach for Americans. This will also help to improve the federal government’s fiscal problem as we spend less on wasteful projects and regulations.
Finally, I’d like to call your attention to a new book being released on May 23rd called Fueling Freedom: Exposing the Mad War on Energy co-authored by Steve Moore at the Heritage Foundation and my colleague Kathleen White at the Texas Public Policy Foundation. It includes the history of how fossil fuels have been a key contributor to economic prosperity and provides more information about these policy proposals and more. I hope you will take time to read it.
Thank you for the opportunity to speak here today. I look forward to answering any questions you may have.
Ph.D. Economist at the Texas Public Policy Foundation. Blog posts are publications by the author.