Crude oil’s plunge would have been cause for celebration in years past. But falling prices today are hammering many of the states that enjoyed oil-fueled economic boom years.
- By Keith JohnsonKeith Johnson is Foreign Policy’s acting managing editor for news. He has been at FP since 2013, after spending 15 years covering terrorism, energy, airlines, politics, foreign affairs, and the economy for the Wall Street Journal. He has reported from Europe, the Middle East, Africa, and Asia and, contrary to rumors, has absolutely no plans to resume his bullfighting career.
Crude oil prices took another swan dive Tuesday, falling below $30 a barrel during daytime trading, their lowest levels since late 2003.
For President Barack Obama’s farewell State of the Union address, cheap oil should be something to crow about. The United States is still the world’s biggest oil consumer, and now prices at the pump are cheaper than they’ve been for a decade. As a result, consumers have more money in their pocket to spend on other things — and apparently have been spending.
Indeed, in past addresses, Obama has touted the role that greater U.S. energy production has played in lowering energy bills, slashing oil imports, trimming the trade deficit, and creating jobs, not to mention cleaning up the environment by unleashing a natural-gas revolution. And to be sure, the gusher of U.S. oil that has hit the market in recent years — equivalent to almost half of Saudi Arabia’s production — has helped cushion the United States and the rest of the world from precisely the kinds of nasty oil-price shocks that embittered State of the Union addresses from Richard Nixon to Jimmy Carter and which prompted Rose Garden pleas from George W. Bush.
But eight years into the American energy boom, the United States isn’t just an oil consumer but also one of the world’s most important oil producers. That means that the prolonged slide in oil prices — which began in the summer of 2014 and hasn’t stopped since — brings as much pain as pleasure. It’s not just OPEC that’s suffering but also Odessa, Texas.
Oil companies that borrowed money to drill holes with abandon when crude prices were in triple digits managed to stay afloat when oil prices started sinking, thanks to cost-cutting and big efficiency gains. But that same resilience, which kept U.S. wells gushing at a record rate last year, just stored up the trouble.
Now, with oil prices close to falling into the $20s, it’s tough for many U.S. producers to make money: Blasting oil out of underground shale formations is a lot more expensive than pumping it out of big, shallow reservoirs in the Saudi desert. The Wall Street Journal reports that U.S. oil and gas producers are together losing about $2 billion a week. As a result, investment banks fear one-third of the companies in the U.S. oil patch could go bust if oil stays cheap. The oil industry already shed about 100,000 jobs last year, and the bleeding continues: On Tuesday, BP laid off another 4,000 employees.
Low oil prices concentrate pain in places like Texas, North Dakota, Wyoming, and other states that benefited from the hydraulic fracturing boom that kicked off around 2008. North Dakota and Wyoming are slashing their budgets, which have shrunk as revenues from oil companies have withered. Once-booming housing markets in West Texas and the Dakota shale patch have gone bust, often leaving expensive ghost towns in their wake.
Even states that aren’t part of the shale boom, such as Alaska, are feeling the pinch from falling oil prices. Alaska relies on income from oil and gas, not taxes, to fund its state budget. But the plunge in crude has poleaxed Alaska’s books, and the state is facing a multibillion-dollar deficit this year. More alarming for Alaska residents is the fate of their beloved oil dividend, a check that arrives each fall with a payout from the state’s oil-investment fund.
Despite falling oil prices, dividend payouts hit a record level last year — and are set to keep on climbing, unless Alaska Gov. Bill Walker manages to trim the payouts, as he hopes. An even starker reminder of crude oil’s free-fall? For the first time in almost four decades, Alaska is considering a state income tax to help cover the shortfall.
On Tuesday night, Obama may again allude to the country’s gangbusters oil production and cheaper gas bills. But for many parts of the United States, oil’s endless plunge cuts both ways.
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