Economics News Article Analysis
Harder, A., & Crittende, M. (2014, March 5). Crisis pressures U.S. on gas exports: Lawmakers urge administration to ease barriers to sales that could weaken Russia’s grip on Ukraine. The Wall Street Journal, p. 12.
Summary of the Article
The production of oil and gas in the US has significantly increased due to the use of horizontal drilling and hydraulic fracturing technologies to exploit new oil wells. The US is expected to become the largest oil and gas producer in the world by the end of this year. Congressional Republicans and some Democrats believe that the US can use its oil and natural gas resources as a diplomatic tool while improving its oil export earnings.
Thus, they are advocating for increased exportation of oil to Ukraine and other countries that are not free trade partners of the US. Currently, Ukraine imports nearly 70% of its oil and gas from Russia (Harder & Crittende, 2014). Thus, Russia has great influence on Ukraine’s political and economic activities since Ukraine heavily depends on its oil.
In this respect, the US intends to eliminate Russia’s influence by exporting its oil directly to Ukraine. Increased exportation is also expected to enable oil companies to earn high prices. Currently, the law prohibits exportation of oil to none free trade partners of the US. Thus, lawmakers are arguing the President and the Department of Energy to loosen the rules on oil exportation.
Relationship with Economic Topic
The article is related to the economic topic or concept of supply in a free market. The international oil market is not perfectly competitive due to the limited number of oil producers and the use of government policies that restrict oil supply. Conceptually, supply has to match demand to enable the market to determine the equilibrium price of a product. Currently, the supply of oil in the US exceeds the demand in the country.
Thus, oil producers/ sellers have to reduce their prices in order to sell all their output. However, the low prices make the supply of oil in the domestic market to be unprofitable. In this respect, eliminating legal restrictions on exports will allow oil companies to sell their products in international markets such as Ukraine where the supply is inadequate.
As a result, US oil companies will be able to take advantage of the limited supply to charge premium prices for their products. If the US is able to maintain lower prices than Russia, Ukraine will buy its oil to reduce its cost of production. Consequently, Russia will not be the main supplier of oil and gas in Ukraine and its influence in the country will quickly dissipate.
Deeper Insights
Increasing US oil exports is likely to boost its economic growth in the short-term. In particular, the country’s export earnings will increase. Moreover, the country’s balance of trade will improve, thereby stabilizing its currency. Generally, increased supply of oil in the US is a competitive advantage since producers can access cheap energy or feedstock to lower their production costs.
In this respect, US products will be more competitive in the local and foreign markets. The resulting increase in expenditure on US products will boost economic growth. However, the competitive advantage is likely to be eliminated in the long-term due to increased oil exportation.
Specifically, the cost of production will increase as US producers compete with their foreign counterparts for oil. Thus, the Obama Administration should thoroughly evaluate the possible economic impacts of exporting oil before using the country’s oil and natural gas resources to address its diplomatic concerns.
Reference
Harder, A., & Crittende, M. (2014, March 5). Crisis pressures U.S. on gas exports: Lawmakers urge administration to ease barriers to sales that could weaken Russia’s grip on Ukraine. The Wall Street Journal, p. 12.