Oil Surplus May Drive Gas Prices Lower

Gas prices drop

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Oil Surplus May Drive Gas Prices Lower
| published April 29, 2015 |

By Thursday Review staff

Six consecutive weeks of upticks and a recent price jump of about 15 cents at the pump in the United States have triggered a general belief that oil prices are again rising, albeit slowly. After all, uncertainty about the violence in Yemen and Syria, coupled with the deepening military intervention in Yemen by rivals Saudi Arabia and Iran have stoked concerns that supplies could begin to shrink in the wake of political and military distractions.

But the problem (or the good news, depending on one’s perspective) is that world oil supplies are still rising at record levels, and countries like Saudi Arabia, United Arab Emirates, Russia, and Iraq are all extracting that crude oil at a furious clip. The Saudis have made it clear that they have no intention of slowing their own production, a cue to their closest Middle Eastern oil-producer partners—Qatar, UAE and Kuwait—to keep those pumps working night and day.

Meanwhile, Iranian officials are hopeful that recently crafted deals with the U.S. and six European countries will allow their pent-up oil reserves, long held in check by tough economic sanctions, to soon flow heartily into world markets. Oil producing countries like Russia and Venezuela, backs against the wall economically and teetering at the brink of deep recession, also have little incentive to slow down.

And the U.S. oversupply is vast. The vicious price war that has waged between some OPEC countries and the American shale oil firms has driven North American supplies up to near-record levels, and abetted that precipitous drop in prices at the pump. According to Bloomberg, the U.S. has nearly 500 million barrels of oil in reserve, and the business of oil storage has become lucrative. Some mega-investors are actually considering stockpiling crude oil in tankers at sea—a buy-low-sell-high investment which they anticipate will one day, in the distant future, finally pay off.

One of Saudi Arabia’s goals may have been to attempt to break the back of the growing U.S. fracking boom, a business model which grew at much better-than-expected rates over the last couple of years. But in effect that price war—which could have made the cost of extracting American and Canadian shale oil too low to continue—spurred instead a lowering of gas prices which had the domino effect of boosting the U.S. economy, especially for the typical American household whose savings may exceed $1100 per year if the trend continues through June. The Saudi’s may have temporarily bested the U.S. fracking regime in that long skirmish, but over the long haul you can bet on the American shale oil companies to gain ground in the wider war. In March, Saudi Arabia produced the most oil it has ever extracted.

Oil prices began their drop last summer, at first levelling off just at the start of summer and at the traditional beginning of the most expensive season for gasoline. As supplies rushed in from a variety of worldwide markets, and as demand dropped in response to a surge of interest in battery-powered cars and fuel efficient hybrids. Newer, even tougher levels of efficiency have been deployed by automakers—voluntarily, and in compliance with government standards—and many Americans have chosen to systematically downsize, trading in gas guzzlers for more efficient cars and trucks. And even the gasaholic vehicles are showing the signs of the times, such as Ford’s introduction last fall of its iconic F-150 pickup truck in an all-aluminum frame.

Some economists even credit some of that drop in demand on technology’s early advances into the engineering and cars and into the tools drivers use: phone apps, GPS and navigation devices, built-in distance and traffic systems, and a myriad of small technologies which make everything from the daily commute to over-the-road trucking more efficient.

Prices have dropped so low, that in many areas companies have halted or delayed completion of drilling wells, especially in the shale oil regions. Those slowdowns have triggered a mini-recession in the energy arena, but most analysts say that once those thousands of wells are completed, U.S. oil prices can be expected to fall more.

On the whole, Americans and energy consumers in numerous other countries may still see some short term peaks and valleys, but oil prices may still decline over the longer stretch, possibly through at least mid-summer and early fall.

Related Thursday Review articles:

Oil Prices May Continue to Decline; Thursday Review staff; Thursday Review; April 14, 2015.

Oil Prices & Saudi Arabia’s Endgame; R. Alan Clanton; Thursday Review; January 8, 2015.