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Oil Prices May Continue to Drop
| published December 23, 2014 |

By Thursday Review staff

Right now, in several U.S. states and municipalities, gasoline at the pump is as low as $2 per gallon. Thursday Review readers in South Carolina and Oklahoma have sent pictures, or told us about, buying gas for $1.92 and $1.89. Gas prices are rapidly approaching their lowest mark in more than seven years, and some experts think the price could edge even lower by New Years.

A gift from Santa, right? And right on time to save everyone a few bucks at the peak of holiday spending. Proof that Santa exists!

Well, Virginia, there is a Santa Claus, but in the case of dropping oil prices he’s not that jolly fellow in the bright red suit at center court at the mall. He’s a group of oil price negotiators, financial analysts, and ministers—most of them located in Saudi Arabia. There, amidst the spreadsheets and the computer programs and the calculations, are those Santas.

Oil prices have been sliding down without so much as a hiccup for months. Back in November, on the American holiday Thanksgiving, the major oil-producing nations (collectively known as OPEC) convened an emergency meeting to decide what action to take. The result of that meeting was—nothing. The major players could not arrive at a solution, and some of the most important members of OPEC—including the Saudis—didn’t really want to alter the flow. Member states hurting the most wanted to implement an oil slowdown in production, at least a temporary one crafted to help demand catch up with supply, and help prices adjust accordingly.

But on the topic of reduced production, Saudi Arabia said, in essence, thanks but no thanks.

Saudi Arabia and the United Arab Emirates vetoed any OPEC slowdown in supply. The best that the other oil producers could then hope for was that demand would edge back up—as it always has—in time to avoid even lower prices before the end of the year.

No such luck. Prices are still dropping, and some energy and oil analysts suggest that we haven’t seen rock bottom yet. International and business pressure again brought the question of Saudi Arabia and U.A.E. supplies to the forefront last week, but again, Saudi Arabia said they would abstain from the debate. The Saudis plan to keep pumping, as do the producers in the U.A.E.

There are lots of explanations for all of this strange turn of events. Just a few years ago we faced dire predictions of oil hitting $5 per gallon in the U.S.—and even higher prices for the European countries almost entirely dependent on imported oil. Demand kept climbing, the new industrial giant China had an unlimited appetite, and many of the most rapidly developing economies of the world—India, Pakistan—needed oil to fuel their industrial and technological growth. Worse for Americans: a clear lack of direction when it came to alternative energy sources, and harsh Federal limits on drilling and exploration.

But now, with prices in freefall, all of that seems like ancient news. Demand is dropping, in theory to almost everyone’s advantage in the U.S. (save for Houston and Dallas), and it begs the question: why?

Well, where failure is an orphan, success has many parents. Alternative energy advocates say that part of that surging market shift has come from recent breakthroughs in alt energy sources, and from cars able to operate at ever-more-remarkable levels of fuel-efficiency. Although energy analysts are unclear on whether alternative energy and battery-powered vehicles are having a genuine impact on oil prices, alt fuel advoctes are enthusiastic about the possibility that as more technology enters the mainstream, demand for traditional fuels will continue to drop. Eventually, the reasoning goes, technology’s supply and demand will catch up, and Americans will begin to move more dramatically into the market for battery-powered cars, hydrogen powered vehicles, and other alternative-fuel automobiles. Further, even mainstream car sale reflect a massive growth in the hybrid markets—those vehicles which use both battery power and internal combustion.

But there are other factors at work, and some business analysts say it will be years—even decades—before the roads are crowded with battery-powered Tesla’s and three-wheeled Elio’s. Part of the explanation comes from the fact that the U.S. is now supplying far more of its own energy needs. American companies are drilling more, on shore and offshore, and feeding more oil into domestic markets. And the U.S.-based companies are getting better at what they do: extracting more oil, more efficiently, and with very little waste—and augmenting the distribution side with newer, hyper-accurate software which allows the oil to get where it needs to go with maximum efficiency.

In addition, the energy coming from newer, non-traditional sources—tight oil and oil shale, for example, which is derived by pumping fluids at extreme high pressure to crack open rock—has more than doubled in Texas, North Dakota, New Mexico, Colorado, and other states.

According to Bloomberg, U.S. oil output will reach approximately 9.4 million barrels a day by this spring—the highest level of American oil production since the early 1970s. One theory holds that the biggest foreign oil producers are making a deliberate effort to flood the U.S. markets—and the markets of some U.S. trading partners—with rock-bottom cheap oil. The reason: undercut this cycle of efficiency and reward, and drive up complacency and demand.

But war and geopolitics also play a part, and again the Saudis face a complex set of variables. The sudden and dramatic rise of ISIS has altered not only the military and political landscapes of Iraq and Syria—adding a gruesome and bloody dimension to an already volatile region and a war-torn Syria. ISIS made a rapid military advance across northern Iraq, its forces driving to within 30 miles of Baghdad and swarming across vast tracts of land right up the border with Jordan, and up to the long frontier with Turkey. In the process, ISIS units took control of oil wells, oil refineries, and oil distribution facilities. At their peak of activity, ISIS was fund its military activity by as much as $2.5 million per day from oil alone, some of it sold on the black market or to corrupt buyers, much of it sold to legitimate middle men and brokers in the region. And as ISIS pushed further south through Iraq, its militants looked to be on track to move close to the Iraqi border with Saudi Arabia. At that point, the political and military stability of a country ruled by the Saudi royal family was in serious jeopardy.

Saudi Arabia has little to gain from the rise of ISIS, and everything to lose. By this reasoning, the Saudis—who see ISIS as a threat—may be seeking to undercut an important source of revenue for the terrorist army. The lower oil prices go, the faster ISIS runs out of operating cash. Even on the black market, ISIS would have trouble selling oil at even half the price of what the militant army could have charged four months ago.

Overall, oil supplies coming from non-OPEC producing nations is beginning to overtake those supplies coming from the OPEC countries. This has produced more than the normal share of market friction, and pressure on Saudi Arabia to cut its supply is likely to continue.

Meanwhile, the collapse of oil prices has also been a disaster for Russia, which has already been suffering under economic sanctions imposed by the United States and the European Union. Demand for oil and gas in Europe has dropped to about 50% of previous estimates, sending Russian oil and gas prices spiraling downward at the exact moment when President Vladimir Putin needs the injection of cash.

For now at least, Americans are reaping the benefits from these world events. Industry analysts suspect that the oil glut will continue for several months, which may mean additional cash in the budgets of many U.S. consumer and families.

Related Thursday Review articles:

Oil Price Drop Hurts Russia; R. Alan Clanton; Thursday Review; December 18, 2014.

Price at the Pump: How Low Will We Go?; Thursday Review staff; Thursday Review; December 3, 2014.