Economics: Oil - Why We Need More Drilling

(Drivebycuriosity) - I am basically an optimist. But there is one development which irritates me - the rise of the oil price. As the chart above shows, the oil price has been climbing since early 2016  and gained more than 100% (calculatedrisk). To make it worse, it looks like that the ascend is accelerating.

The recent rise is caused by a climbing demand, especially in the US. The Americans are moving again to the suburbs, buying more cars & driving longer distances. Stronger global economic growth is also fostering oil consumption. So the US demand for gasoline climbed already onto new records. Otherwise OPEC is curbing production because they want even higher prices. Oil is getting scarcer.

I am spooked by history. Nine out of ten of the U.S. recessions since World War II were preceded by a spike up in oil prices, writes Prof. James D. Hamilton, University of California, San Diego ( pdf econweb). Another study by Prof.  Hamilton shows that the oil price shock from 2008 - from summer 2007 through July 2008 the oil price spiraled from about $50 to $147 -  turned the 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). Low income suburban homeowners suffered most from the rising gas prices.  Poor homeowners are called "subprime" and their delinquencies are known as "subprime crisis."

                                    Preventing The Next Oil Price Shock

We are still far away from the danger zone, which certainly hovers above $100. But history also shows that oil price rallies attract speculators, including hedge funds, who purchase oil futures on the financial markets as a bet on further price gains, the so-called momentum players. Their herding behavior causes snow ball effects like the oil price spike of 2008.

How can an another oil price shock be prevented?  The answer is more drilling - especially in the US.  Rising American oil production - especially by fracking - caused the oil price drop in 2014. The hiked US oil production is now partly compensated by more oil demand and a curbed OPEC production. So we need more drilling in the US to compensate OPECs strategy. The Trump Administration announced a plan to expand drilling in US continental waters - this would be a step in the right direction  (washingtonpost).