Why Oil Prices Will Continue to Fall

self-serve gas pump

photo by Lisa Whitten

Why Oil Prices Will Continue to Fall
| published July 3, 2015 |

By Keith H. Roberts Thursday Review contributor

The month of May saw an uptick in gasoline prices in the United States and dozens of other countries. But only a slight increase. Despite a few grouchy predictions that because oil prices almost always rise they will again continue to rise, just the opposite has happened. Oil prices are going down again, worldwide.

There are dozens of reasons. The soon-to-be-announced arrival of Iranian oil, pent-up for decades by economic sanctions; the relative over-success of North American hydraulic fracturing, also known as fracking; a better-than-expected return on hybrids, battery-powered cars and other alt fuel options in the U.S.; vastly improved delivery technologies, not the last of which are the myriad new software available to make shipping fuel from point A to point B more efficient (ever see oil tanker trucks passing each other on the same interstate highway?); ever-improving gas mileage on traditional internal combustion engines; and the ubiquity of automotive and handheld GPS systems, which some economists theorize save Americans collectively from driving thousands of miles unnecessarily using bum directions or failed intuition.

But many energy analysts and oil experts suggest that all those reasons, valid though they are in their unique but small ways, represent mere window dressing. The real reason oil prices continue to slide downward: too much oil. Period.

According to conservative estimates, we are living in a period of the largest oil glut since the 1997 Asian economic meltdown, and there are predictions that the current glut may topple even the great 1985 surplus. That oversupply will continue through at least the end of this year, and possibly into the first quarter of 2016. This leaves little wiggle room for prices to work their way back up.

Like last year, drivers in the United States may see gas at the pump drop to as low as $2 per gallon by September. The last six year low record was set in mid-January this year, when a barrel of oil reached $45—a figure not seen in a generation. We may see that again later this year.

At the heart of the oil glut is Saudi Arabia’s unyielding intention to place as much hurt on the U.S. shale oil and fracking industry as is possible. More than any oil producer, Saudi Arabia fears American independence from its Arabian Peninsula supplies, and the North American oil boom looked to be putting a deep dent in Saudi Arabia’s business model. Saudi Arabia also wants to pump oil as fast as it can to keep a few steps ahead of its closest competitors within OPEC, including Kuwait, Qatar, the United Arab Emirates, and Venezuela. Saudi Arabia shows no signs of slowing its oil production, which means that other OPEC countries must follow suit.

Cash-strapped Venezuela, caught in a devastating spiral of recession and shortages, would prefer a worldwide slowdown in output, but Saudi Arabia and its closest partners see little reason to back off. Russia, also a major oil producer, would like to see prices rise—if for no other reason than to bring relief to an economy suffering under the weight of the heavy sanctions imposed for its meddling in the Ukraine—but Russia is also trapped by the global conditions largely driven by Saudi Arabia’s battle of wills with U.S. shale oil producers.

Aside from a couple of dissenters, most of OPEC’s 12 member states want little to do with anything resembling a slowdown in production. In fact, Saudi Arabia may increase output yet again as part of its intensive fight to outflank U.S. producers. This may push yet more oil into the reserve tanks worldwide, and may drive prices down within weeks.

Waiting in the wings is Iran, eager to begin selling its oil in the global marketplace. Last week’s narrative that the talks between the U.S., Iran and five other countries were at the brink of collapse has been replaced with this week’s guarded but good news: Iran and the U.S. are close enough to a deal that there are few factors in the way of a settlement, which would mean the end of decades of sanctions against the rogue state. Iranian oil could hit the world’s markets as early as the end of this year, meaning another surge of oil flowing into already filled storage tanks.

In the meantime, Americans may see a few bumps here and there, with vacation driving edging prices up—however briefly—but with the overall price of gasoline dropping steadily through the fall. Some economists estimate that the average U.S. household could save around $1100 per 12 months if prices continue to fall, or stay below $2.70 per gallon.

Related Thursday Review articles:

Oil Surplus May Drive Gas Prices Lower; Thursday Review; April 29, 2015.

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