Oil: Why We Need Fracking Even More

(Drivebycuriosity) - The Near East is in a turmoil - again. Saudi Arabia arrested a group of powerful princes & confiscated their fortune because of alleged corruption cases. According to Bloomberg "domestic turbulence is being compounded by a resurgence in regional tensions, as Saudi Arabia blames Iran for an attempted missile attack on Riyadh’s international airport that it says could be considered an ´act of war`"(bloomberg).

The oil prices responded as usual to the Near East turmoil and jumped above the $60 mark, the first time since summer 2015, amplifying a rally originally caused by Opec production cuts. "Saudi Shocks Reawaken Global Oil Markets to Political Risk", writes Bloomberg. Pundits claim,  if the situation in the region escalates - maybe even into an outright war with the Iran - the price of oil could jump much higher.

The situations reminds me of the years 2007/08 (driveby). Then the oil price spiraled from about $50 to $147. The sharp spike was caused by the Iran conflict - and speculation on a possible war in Middle East. A study by Prof. James Hamilton (University of California, San Diego) shows that this oil price shock turned the US economic slowdown into a severe recession (econbrowser): "The oil price increase over 2007:H2-2008:H1 should be regarded as a key development that turned the slowdown in growth into a recession" (archives). Other researchers came to the same results: "Oil prices played a role in eventually bursting the US subprime bubble....In 2003, the average suburban household spent $1,422 a year on gasoline, which rose to $3,196 in 2008 (oilprice). "Rising household energy prices constrained household budgets and increased mortgage delinquency rates" (oilprice).

Could this  happen again? I am optimistic. The global oil market has changed in the recent years.  New technologies, especially fracking, raised the global oil production, especially outside the Near East region. The return of the US production, thanks to fracking, caused an oversupply on the oil market - and the oil price crash of 2014.  Today the world is much less dependend on oil from the fragile Middle East region.  Apparently former US president Obama didn´t understand the geopolitical issues and was fighting US energy production with strict regulation on oil pumping & exploration. Fortunately the new US administration cares more about energy independence and is reducing regulation.  If the turmoil in Near East worsens, climbing oil prices would make fracking even more profitable and stimulate us oil production further. So more oil from the US would at least partly compensate missing oil from Saudi Arabia and will help to avoid a crisis a la 2008.