Will Deregulation Really Bring Oil Jobs Back? Probably Not...

There is murmuring on Wall Street that a Trump presidency will lead to deregulation, and that it is a good thing for oil companies. We all know how the economy of western North Dakota has declined due to changes in the oil markets, so will deregulation really turn this situation around? To better understand, we need to drill down into the economics of the situation.

Let’s first examine the question about whether regulation is impacting oil production. We know that fracking is a hotly contested technology, because it involves injecting pressurized fluid into the ground to breakup formations that contain oil. A highly visible EPA study recently concluded that fracking poses no significant risk to contaminating ground water, which mitigates many reasons to strongly regulate fracking. What could be the major reason the EPA felt there was little concern for contamination? It turns out that fracking occurs far deeper than the water tables we rely on for drinking water, so it is relatively rare that a 10,000 ft. fracking well would impact a 1,000 foot reservoir for human drinking water.

Surprisingly, fracking has few regulations on the national level and is mostly left to the states to regulate. The result is some states shun the technology while others embrace it. The federal government only has strong regulation over wells drilled on federal land, and the states get the last word on any private land. Since a vast majority of wells exist on private land, it is unlikely that a change in federal policy will have much of an impact on all the current and future private wells.

But oil production has drastically decreased in recent years, right? Well, it is not the case that it has drastically reduced, but rather the case it is no longer drastically expanding. And the reason it is not expanding has nothing to do with regulation nor the fact they have failed to find oil. Rather, we became too good at finding the oil. The introduction of fracked oil, especially Bakken oil, to the world markets has led to an oil glut. This has significantly reduced the price of oil for the foreseeable future. As you can see on the graph below from cnbc.com, in 2014 the overall price level of WTI oil slumped. This had much to do with an enormous amount of North Dakota oil wells coming online and sustainably supplying the market with oil.

The oil “bust” in western North Dakota isn’t a “bust” in the traditional sense. It isn’t that the oil dried up or was found to be overexaggerated. Rather, there was so much oil there, it had an enormous impact on the world market and drug down the prevailing price level for oil. With an oversupply of oil, buyers would pay less, and producers had no more incentive to expand or work harder to supply the market.

In conclusion, it is unlikely that any deregulation of fracking on the federal level would have any measurable impact on the production of oil in the United States. However, it is still possible for prices to increase if one particular wild card were to occur. If the United States goes through a period of significant inflation, which we haven’t seen since the eighties, then naturally the price of oil will go up too. So in this case, it wouldn’t be the president-elect’s deregulation effort that lead to an increase in oil prices, but rather an unrelated event that caused the overall prices on everything else in the economy to increase.