Price at the Pump: How Low Will We Go?
| published December 3, 2014 |

By Thursday Review staff

Remember those dark days of 2008 and 2009 when gas prices kept climbing? For Americans, it was the single biggest downward draw on what the White House was hoping to make a final push toward a post-Recession economy. But those prices at the pump kept inching up, and almost anything—from weather disruptions to oil spills to international tensions—nudged prices higher. The result was a shrinking household budget, coupled with lower wages, even as jobs began to finally come back to life. According to the U.S. Department of Energy, in July of 2008, the national average was $4.43 per gallon. And there were predictions that it could go even higher.

In those days, business analysts, economists, and oil industry experts alike all predicted that we would soon see gasoline reach $5 per gallon. We got close, but not quite there.

In the intervening years, the markets calmed down, but the fear has always been that more shocks could send those prices still higher. It was only a matter of time.

Then, early this year, everything that could go wrong, did go wrong. A dangerous crisis in the Ukraine escalated into civil war, with the very real threat that Russia’s Vladimir Putin would cut off some, or all, gas and oil supplies flowing from Russia into the Ukraine, and it was possible that he would meddle even with the tiny domestic supply produced in eastern Ukraine. Putin also used his weight to indirectly lean politically and militarily on the rest of Europe, a continent and an integrated economy highly dependent on that Russian oil.

Later in the spring came ISIS, an extremist militant army which swept out of the chaos and lawlessness of northern Syria, moving across northern Iraq, taking control of areas right up to the borders of Jordan and Turkey, and seizing—among other things—oil production and distribution facilities, including the massive refinery at Baiji, one of the largest in the world. According to Reuters and the energy website al-Arabiya, that refinery—heavily damaged in fighting between ISIS forces and Iraqi troops this past summer—may take up to one year to reach even partial capacity, and full repairs could take longer.

Even the continually rising demand for oil by China has reached epic levels this year, as the post-recession giant resumes full manufacturing speed. Meanwhile, nerves are raw in the South China Sea, where huge Chinese drilling platforms are positioned in waters which may yet prove to belong to Vietnam or other countries.

These are the sorts of tensions and flare-ups that create ulcers and sleeplessness for economists and business analysts in the United States and in the financial centers of its allies.

So why aren’t prices at the U.S. pumps rising in that all-too-familiar way? Remember those days when if the Energy Secretary sneezed, prices climbed 10 cents?

After six weeks of falling oil prices in the U.S., this week gas stations from Maine to Miami once again saw prices fall still more. Now, some energy analysts suggest, there is no bottom in sight. The national average as of Monday was $2.77, according to a report issued by the American Automobile Association. Several economic forecasters have said that the national average may be even lower than AAA’s figure, and as of today, that number may have edged down to $2.70.

According to American energy hawks—and there are plenty lining up to say “I told you so”—it’s all about domestic drilling and alternate domestic sources. U.S. crude prices on the wholesale market are down 38% when compared to June, which means—if this keeps up—Americans may soon be paying lower prices for gas than anything seen in more than a decade. In fact, both the AAA and several economic forecasters predict that in some states the price won’t bottom out until it hits $2.00 per gallon. Domestic supplies are swelling at rates much faster than ever predicted, and this is pushing prices down. American supplies of shale oil, as well as improved supplies coming from traditional domestic fields, has meant that Americans are supplying a much larger share of their own energy than in decades past.

Aiding and abetting this windfall for U.S. consumers: disagreement among OPEC nations over how to counter those lower prices. Some of the biggest suppliers, accustomed to a more-or-less steady American demand for Arabian crude, are at a loss as how to contend with what may be a shrinking overseas demand by the U.S. Further, most OPEC countries now compete head-to-head with each other in an increasingly complex oil and energy market. Saudi Arabia even cut its oil prices for the U.S. market in an attempt to stay ahead of possible shifts in the production from its competitors among OPEC.

OPEC met on what was Thanksgiving Day in the United States, hoping to reach a consensus on how to counter a market which appears to be bottoming out. But that meeting in Vienna produced a mixed bag of counter-measures, and in the end a slight majority of OPEC states voted to maintain oil production levels—with no attempts to limit supply. In fact, OPEC even acknowledged the seriousness of the long-term problem its member states face.

“[OPEC countries] confirmed their readiness,” the organization said in a media statement, “to respond to developments which could have an adverse impact on the maintenance of an orderly and balanced oil market.” Translation: OPEC must find other ways to keep that river of cash flowing.

Russia, struggling to overcome economic sanctions imposed by the EU and the U.S., and now teetering at the brink of a deep recession, has even offered up hugely elaborate plans to construct a massive series of pipelines connecting its oil fiends and refineries with China—the world’s biggest consumer of oil. Moscow hopes that by making its product available directly to China, Russia’s economy can find a source of sustenance in the coming decades when a similar drop off in demand affects Europe. China’s heavy demand for oil has at times exacerbated the cost of energy in the U.S.

In the U.S., however, oil prices just keep falling. A few contrarians suggest that when prices do finally bottom out, be wary of another long period of rising costs at the pump. In the meantime, American retailers hope to reap the rewards as households—many previously struggling—begin to adapt to having that little extra money at the end of the month. By some estimates, a typical U.S. family household could gain an additional $1100 per year if gas prices drop lower than $2.25 per gallon.

The biggest beneficiaries of falling oil prices? The U.S. auto industry; already having a good year despite a record number of product recalls, it now expects car and SUV sales to increase even more in the coming weeks and months.

Energy hawks say that the template of lower gas prices can continue unchecked as long as the green-light is given for more drilling, and more exploration of shale oil deposits. Others point to the recent price dip as evidence that development and construction of the controversial Keystone XL Pipeline should be rebooted as quickly as possible.

Green advocates, however, also point to measurable drops in demand for fossil fuels. In many states, alternative-energy vehicles are becoming more common, and many of the hybrids and electric vehicles are no longer considered an oddity. Battery-powered cars, like several models now being built and sold by Tesla, are also gaining momentum in sales. Tesla, which is based in California, hopes to complete construction of new charging across large parts of the United State. Tesla currently operates 126 charging stations along highways in North America, but hopes to add dozens more next year.


Related Thursday Review articles:

Holiday Cheer: Low U.S. Oil Prices; Thursday Review staff; Thursday Review; November 26, 2014.

Tesla: A Case of Supply Versus Demand; Thursday Review staff; Thursday Review; November 7, 2014.