ROBINSON TOWNSHIP, PENNSYLVANIA – OCTOBER 26: A hydro-fracking drilling pad for oil and gas operates October 26, 2017 in Robinson Township, Pennsylvania. The Kendal well pad is using a horizontal drilling technique for extracting oil and gas in the extensive Marcellus shale formation. (Photo by Robert Nickelsberg/Getty Images)
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“Rates of return get pretty minimal below fifty dollars.” That how legendary oil man Harold Hamm described the extraction state of play to Gregory Zuckerman in his 2013 book, The Frackers.
The high cost of stateside oil drilling rates extra thought right now, and as squabbling continues among energy proponents about which energy is the “correct” one. In a recent piece at the Wall Street Journal, Always On Energy Research vice president Isaac Orr and policy analyst Sarah Montalbano wrote that “Solar can’t compete with other energy sources without” federal handouts.
No judgement will be made about their argument. Instead, it will be said that solar, like any other market good, can’t be judged in static fashion. To see why, contemplate natural gas. For the longest time liquid natural gas production made less sense given the challenge of shipping it long distances domestically or globally. That’s no longer true.
It raises questions about what solar power could be, not what it is now. By all accounts, there are times in the day during which so much solar energy is produced that its price plummets. What’s the long-term potential there?
About what’s been asked, the same goes for domestic oil exploration. See the Hamm quote above. It’s a reminder that oil hardly stands on its own right now.
Consider the price per barrel at which frackers break even. $10/barrel and $7/barrel is not the number, but that’s how low the price of crude fell in the 1990s and 1980s respectively.
Thinking about how cheap oil formerly was, it rates asking why. Was U.S. energy exploration abundant in the 20th century’s closing decades? Quite the opposite. As Frackers author Zuckerman made plain in the book, the final two decades of the 20th century were “among one of the worst periods in the history of the domestic energy industry, and an estimated 90 percent of the oil and gas companies went out of business.” With the commodity so cheap, there was no economic way to extract crude in the U.S.
Was the U.S. economy in decline during those decades, along with the global economy? Hardly. Lest readers forget, oil fell as low as $7 during the booming Reagan ‘80s, and $10 in the similarly booming Clinton ‘90s.
So, what’s the story, or what was it? Consider the U.S. dollar that every American worker earns. Consider also that oil is priced in dollars. In the ‘80s and ‘90s, a strong dollar meant that oil and its byproducts like gasoline were very cheap. Americans hardly suffered this state of economic affairs, but the U.S. energy industry did.
Which is a response to Orr and Montalbano. While they claim U.S. solar can’t stand on its own without federal subsidies, they gloss over the inconvenient truth that U.S. oil producers can’t remain upright without a weak dollar that every American suffers and that props up the price of crude.
Will it always remain this way? The speculation here is that it won’t. As mentioned previously, it’s foolhardy to apply static notions to any market good. It’s possible in time that fracking returns will be abundant at $10 in the way that they presently only are above $50.
For now, the subsidy argument cuts both ways. If Orr, Montalbano, and other alternative energy critics want the government to get out of the business of handing out favors, they would help their case by pointing out that energy sector favors have hardly stopped at solar, wind, and others.
As the prominence of fracking attests, the critics of alternative energies are lobbing potshots from quite the glass house. But if they’re serious about subsidies, they’ll acknowledge the one that the domestic oil industry can’t compete without.