The United States as a Petrostate?

The financial press has recently been celebrating that the United States has reached all time-highs in oil production. Some Republicans, accustomed to blistering Biden for crippling our oil and gas extraction fear losing an issue.

Into this confusion steps the indispensable  John Tamny, who points out the real reasons U.S. production is high, and they are not causes for celebration.

Tamny makes two powerful points:

1. U.S. petroleum production rises only when global oil prices are painfully high. When the global price of oil falls below $60 per barrel (in today’s lamentably weak dollars) U.S. production declines precipitously. That’s because the average cost of extracting the oil from say, the Permian Basin (more than $40 a barrel) or the Dakotas ($50-$60 a barrel) makes the trade uneconomic at most U.S. well heads.
2. Dominating the nominal (USD) price of oil is not the supply of or demand for oil but the dollar. Weak dollar—> expensive oil; strong dollar—>cheap oil.

You can see this latter point by comparing the dollar price of oil to the dollar price of gold as in the two graphs below (both free from Macrotrends).

USD Price of Oil, per barrel, 1995-2023

USD Price of Gold, per ounce, 1995 to 2023

The graphs track reasonably closely: the value of the dollar, as measured by the gold price, dominates the dollar price of oil.

We kept the periods to less than 30 years to keep the graphs readable. If you want to see a more depressing version, look at the same graphs but using, e.g. 1965-1985. It was not the Arab oil embargo that sent the price of oil soaring, but Nixon taking the dollar off gold. But for that disaster, a barrel of oil would be priced well below $10 today.

The dollar strengthens when the U.S. strengthens, making investors want dollars. That makes oil cheap and thwarts U.S. production.

When the U.S. weakens, so does the dollar. In a weaker United States, the portion of U.S. gross domestic product (GDP) earned from the extraction and sale of raw materials rises just as if we were some third world country digging ditches for a living.

The strengthening of the U.S. domestic oil industry is an indicator of national weakness, and the chaos abroad in the world. That chaos is in no small part the result of the U.S. government funding wars it does not have the will to finish as in Ukraine and allowing our real enemies to run rampant shooting up shipping in the Red Sea. If the Republicans want an issue, maybe they should stick with that.