The saying goes that when China sneezes, the world gets a cold. In this case, the world gets pneumonia. The unprecedented two-day shutdown of the Chinese stock market last week to keep it from collapsing, and the resulting selloff on Wall Street — the worst beginning to a year in recorded history — have people and experts alike scratching their heads. After all, the conventional wisdom says that falling oil prices, although bad for segments of the economy, lift all other boats.

The fact is that the Chinese contraction is a cause, not an effect, of the oil-price collapse. The idea that the current oil glut is due to fracking is misleading. An expanding world economy would suck up fracked oil like a Cajun Sting daiquiri on Mardi Gras Day. But the Chinese economy is imploding for many reasons, not the least of which being the inherent flaws of a centrally planned economy. Thus, the modest expansion of supply due to U.S. fracking has coincided with a serious reduction in demand. The price had to give. And with OPEC refusing to cut production, with Saudi Arabia, Iraq, and other Gulf States maximizing output and Iran’s vast reserves about to come online, there’s no indication that the U.S. reduction in rig count is going to cut into supply or stabilize prices.

In fact, there is every indication that, for the more expensive oilfields like the deepwater Gulf of Mexico, recoveries in rig count and vessel employment could be a decade away.

There is very little the U.S. can do about the situation. At the moment, bargain-basement Iraqi oil is being offloaded into the U.S. production stream at terminals and refineries on the U.S. Gulf Coast. With oil transport by supertanker cheap, refiners and their downstream customers see little pain in U.S. drilling cutbacks, even though the economies of Louisiana, Oklahoma, North Dakota and large parts of Texas could face a nuclear winter.

Ironically, recent legislation overturning an '80s-era ban on U.S. oil exports is meaningless when regulation, taxes, high labor costs, and environmental burdens render U.S. drillers uncompetitive. There are only two answers: make drilling cheaper or slap tariffs on imported oil to the point that U.S. oil, even at its inflated cost, is cheaper than imported oil. Whether the voting public has the stomach for $3.50 a gallon gas again in order to save the U.S. oil industry is a big question.

 

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