THE BLOG
11/23/2014 12:40 pm ET Updated Jan 23, 2015

For Once a Positive Crisis

The original meaning of crisis is a turning point, decisive or crucial in time, whether good or bad. The overused negative interpretation is of a time of danger or threat. The U.S. is now in a real crisis but one that relates directly to the old meaning of the word.

The change in the global energy landscape primarily due to America's fracking industry as well as advances in energy conservation is causing a decisive change in the American economy and America's role in the world.

Domestically over a year's time, the drop in energy prices will allow on average, every American household to save over $500 - better than any middle class tax cut. And these savings do not take into account diminished inflation as cheaper energy whether from manufacturing, farming, or shipping work their way through the economy.

Competitively the United States is now in a unique global position. It is spending significantly less money abroad to import oil giving its balance of payments a huge boost, and the oil it does import (America can not produce certain grades) is on the whole cheaper than oil other countries import.

Because the U.S. dollar is the reserve currency most of the world's oil is traded in dollars. Thus when America imports oil, it is not affected by the change in value of the dollar versus other currencies.

With the recent rise in the dollar, Europe as an example pays comparatively more for their oil than the U.S. This does not mean that Europe, China, Japan etc. are not benefiting from the lower oil prices. They are just benefiting less.

America is also now the largest producer of natural gas in the world. Natural gas is crucial in competitive heavy industrial manufacturing and it is now substantially cheaper to purchase natural gas in America than in Europe or Asia. American gas sells for about $4 per million BTU, compared with about $10 in Europe and $18 in Asia. According to the IMF, this has lead to a 6% average increase in America's manufactured export because of greater competitiveness.

The International Energy Agency has warned that Europe will loose a third of its share of global energy intensive exports over the next two decades because its energy prices will remain higher than those in the U.S.

The agency did not mention China, but obviously the situation should be similar to Europe in reference to non labor-intensive but energy intensive manufacturing.

It is not impossible to imagine that with out the new energy savings the America economy would be either standing still or slowing. Europe is America's largest trading partner and the fracking revolution has essentially, for the time being vaccinated the American economy against Europe's economic malaise.

So the question is how far can oil drop, and will further falls in the price of energy kill the goose that is laying the golden egg, the price incentive to invest in fracking, clean energy and conservation. Energy pricing is based on world supply and demand plus some government intervention. Most experts believe that primarily the fall in the price has been caused by the addition of US fracking product in the market increasing the global supply. For example, the United States used to be the main buyer of Nigerian oil. Since the United States now now buys very little from there, Nigeria has been forced to find a new customer at a cheaper price and with more difficult terms - China.

The medium breakeven price for U.S. shale oil is $60 per barrel. Lets add a $10 risk premium, the absence of which would limit investments in shale. So although predictions are of course difficult, there is some logic that says in the $70 dollar area, shale production slows down causing prices to stabilize or rise.

Crises are turning points and at any turning points one must be wise enough to force the situation and to take advantage of one's luck. And with the development of fracking this happened. America's often disparaged political cultural and its hard to explain relationship with industry functioned correctly.

There is a saying that America talks like Jefferson but acts like Hamilton In other words, while Americans say they want government out of industry and individual enterprise, in reality government action spurs the economy. Whether developing the Erie Canal, railroads, airplanes or the internet, the American government often acts as the original VC for private innovation. Since the 1970s the federal government has spent over 100 million dollars funding basic research into fracking, while extending tax breaks to companies involved in the industry.

As Dan Steward, an executive at Mitchel Energy where fracking was first successfully developed, stated:

[The Department of Energy] did a hell of a lot of work, and I can't give them enough credit for that. DOE started it, and other people took the ball and ran with it. You cannot diminish the DOE's involvement.

America's success in lowering energy pricing and energy is also starting to pay substantial dividends internationally:

It is further pressuring Iran into pragmatism. Under the sanction agreement Iran is allowed to sell oil to only a few nations. Because of the falling prices, in order to keep their economy above water they must increase volume. If Iran enters into a nuclear deal with the United States, it will be allowed to openly sell more oil.

Here again the rules of supply and demand click in. Iran will be just adding more to the oil glut, which will limit upward price pressure.

Because hydrocarbons are so crucial to Russia's economy the falling oil prices proliferates the force of the sanctions on Putin. Of course the unknown is how Putin's worldview is trapped within Kremlin cronyism

As an example as Russia signs gas deals with China, Putin appears to believe China's rhetoric that Russia has a geopolitical friend. More likely, however, China sees its dealings with Russian as an opportunity of getting energy resources at fire sale prices.

Lower energy prices also gives China more space to re-orient its economy away from its reliance on export - a necessary adjustment in addressing the global balance of trade, which many economists believe helped bring about the 2008 crash.

Globalization has changed the definition of leadership. A nation's economic well-being is more then ever an outward sign of power. China exemplifies this new reality. Its defense budget is 2/3 less than the United States yet Beijing has the economic ability to propose several international development banks and its Silk Road initiative. America needs to keep pace, and its economic revival, partially based on its newfound energy wealth lends fresh legitimacy to Washington's role as a global leader under any definition.