Because of falling oil prices, a barrel of oil today costs about half what it did a few years ago. That means motorists are paying a lot less for gasoline, airlines are suddenly more profitable, the cost of shipping goods from China is down and Venezuela is facing an economic crisis. Also, oil companies are looking a lot more risky lately, which has caused the Dow Jones Industrial Average to lose almost a 1000 points in the past 10 days.

In other words, falling oil prices are good news for some and bad news for others. The principal reason for sagging oil prices is simple Economics 101 stuff – the supply is greater than the demand. Partly that’s because our cars and trucks are a lot more fuel efficient than they were just a few years ago but mostly its because fracking has made a lot more oil available.

Fracking is a way of releasing oil and gas trapped in shale by fracturing the rock with fluids injected under high pressure. It costs a lot more than drilling conventional wells, which means it is only profitable when energy prices are high. It accounts for more than half of total US oil and gas production today and has made the US energy independent for the first time in generations. It also is a geological disaster than leaves behind a trail of local earthquakes and polluted ground water.

In an interview with Slate Magazine, Michelle Foss, chief energy economist at the University of Texas at Austin’s Bureau of Economic Geology, says the group of small to medium size oil companies that have fracked their way to riches aren’t the most efficient or strategic people. In the early days of the fracking boom, which started in 2008, most were driven by “brute force and ignorance” as they tried to get the crude oil out of the ground as fast as possible. That approach led to lots of wells in areas that didn’t have much oil to begin with. Those wells quickly ran dry.

Foss says a period of low prices could change the U.S. drilling industry for the better by forcing it to improve its methods. A more cautious industry would be good for the environment and for investors, who would see less of their money sunk into failed wells. In other words, Adam Smith’s unseen hand and the magic of the marketplace will always lead to the most efficient use of resources – eventually.

The OPEC countries could get oil prices back up if they simply dialed back on the amount of oil they produce but they have elected not to do so. Mostly that’s because fracking is not profitable if the price of oil falls below $70 a barrel. By allowing the world price to plummet, they are hoping to drive all those fracking companies out of business which will cause supplies to drop and prices to rise in the future.

It’s a good strategy. Unless the world comes to its senses and figures out how to switch to mostly renewable energy in the meantime. That would be the best news of all.

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Tags: Adam Smith, fracking, oil prices, oil supply, OPEC, renewable energy

About the Author

Steve Hanley I have been a car nut since the days when articles by John R. Bond and Henry N. Manney, III graced the pages of Road Track. I know every nut, bolt and bullet connector on an MGB from 20 years of ownership. I now drive a 94 Miata for fun and the occasional HPDE track day. If it moves on wheels, I am interested in it. Please follow me on Google + and Twitter.

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