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Energy & You
By Karl A. Parker, President & GM, Parker Family of
Businesses
The Truth Contributor
Gas Below $2/gallon? Part I
I remember my father becoming really upset in 1977/78 when
gas soared to $.77 a gallon! He was upset with the
government for allowing foreign interests to dictate gas
prices in the USA. Hmm…. Sound familiar? However, global
energy economics will continue to dictate gas prices in the
USA!
Why are gas prices so low now?
Northwest Ohio residents are able to find gas below $2.00 a
gallon. Twelve other states have locations were gas is less
than $2.00 a gallon as well. I recently (two days ago)
filled my tank up for less than $.50 a gallon! Can you
believe that? (That’s because I am in Saudi Arabia!
J)
I will provide more on that in another article.
According to AAA, the average gasoline price in the U.S.
today is $2.39, the lowest since 2008 during the start of
the Great Recession. What in the world is going on?
Well, it is a direct result of basic supply and demand. Adam
Sieminski, administrator of the Energy Information
Administration (EIA), the Energy Department's statistical
arm, attributed the lower pump prices to lower prices for
crude oil (due to higher oil inventories) and weak fuel
demand.
Primary driver of low prices
The global price of Brent crude oil has fallen by 40 percent
since late June and closed at below $60 per barrel last
week. (Brent Crude is a major trading classification of
sweet light crude oil that serves as a major benchmark price
for purchases of oil worldwide.)
This is amazing for consumers and can serve as a catalyst
for growth for the US economy. I anticipated this drop after
we, Parker Energy Solutions, hosted the Regional Energy
Forum 2.0 last March at The University of Toledo. However, I
thought it would occur over the summer rather than in the
fall and winter. (Jennifer Torres-Parker can confirm this!)
Ironically, I held a different view in the fall of 2012.
During my Toledo TEDX Talk, I predicted that economic growth
in the BRIC (Brazil, Russia, India and China) nations,
combined with instability in the Middle East and other parts
of global community would drive gas prices well above $6.00
a gallon!
Again, why is this happening?
Oil production around the world has been exceptionally
strong in recent years. The shale oil boom in the U.S. has
pushed domestic production up 70 percent since 2008 as a
result of the shale oil discoveries in North Dakota.
Production is expected to reach 9.4 million barrels per day
in 2015, an increase of four percent over this year and the
highest domestic crude oil production since 1972.
Additionally, Organization of Petroleum Exporting Countries
(OPEC) members (Algeria, Angola Ecuador, Iran, Iraq, Kuwait,
Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates
and Venezuela), continue to produce oil at high levels.
Specifically, Saudi Arabia (KSA), the world’s largest
producer oil, stated that it does not plan to cut production
anytime soon. KSA intends to continue to produce over 9.6
million barrels/day in an effort to maintain its global
market share.
OPEC members produce over 30 million bbl/d in aggregate. The
US’s oil production increase, combined with OPEC and
non-OPEC oil producing countries, such as Russia, continued
production, have increased oil inventory levels. Oil
inventories are 124 million barrels higher on average
compared with the same time last year. This is the largest
year-over-year growth in November and December since 1997!
Again basic economics – large inventory (supply) lower oil
consumption (demand) = lower prices.
Why is oil demand so low?
Demand for fuel is growing slower than expected in Asia and
Europe because of weak economic growth. Japan, specifically,
one of the world’s leading oil importers, has slipped into a
recession. The US remains the largest consumer of oil.
However, domestic fuel demand is trending lower as a result
of changing driving habits and an influx of more
fuel-efficient cars in the market. Moreover, energy
efficiency strategies are being deployed across numerous
industries throughout the US in an effort to increase
profitability thus resulting in reduced oil demand as well.
How long will low gas prices last?
Energy experts around the world are debating this very
issue. Many predict that the low prices will remain at this
level throughout 2015. Major global oil producers such as
Iran, Russia and Venezuela require oil to sell at closer
$100. More importantly, US shale oil producers’ business
model begins to crumble when oil prices dip $70. This could
force several of US shale oil producers out of business thus
reducing supply. The impact on the US economy could take a
small hit as well, since the oil and gas industry has been
the primary growth engine for the US economy over the last
five years.
Part II of ‘Gas Below $2/gallon?’ will explore further why
gas prices are slow low.
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