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Opinion: Consumers winning with low oil prices, for now

by Thomas Miller for Oilprice.com

Lest we be too quick to forget whence we came, America is now 9-months into lower gasoline prices, which started their swoon the week of June 30, 2015 from a lofty national average just under $3.70, tumbling almost every subsequent week before bottoming and bouncing from $2.02 the end of January, according to gasbuddy.com.

It is estimated that for every penny gas goes down, consumers collectively save $1 billion. Therefore, the 2014/2015 drop has accounted for at least $50 billion in your pocket and mine. Well, maybe a little less than that in each of our pockets, but the national average is about $500 bucks per family. The question begs then, has that money shown up in other parts of the economy?

Dr. Bernard Weinstein, Ph.D., Columbia and Associate Director of the Maguire Energy Institute at the Cox School of Business at Southern Methodist University in Dallas says it has: “No question we’re seeing the effects of lower oil prices throughout the economy.”

On the economic front, although retail sales were not as strong in December and January, most analysts are shrugging it off as a temporary blip. The manufactured durable goods number in January did tick up slightly more than expected, with nearly a 3-percent increase. Interestingly, with fuel prices lower, the Ford F-Series, Chevy Silverado and Dodge Ram trucks have been the top three selling vehicles (in that order) since September, 2014.

The usual beneficiaries of lower oil prices are still benefitting: Transportation, airlines, power generators, refiners and any business directly using oil or natural gas for fuel or feedstock.

However, the decline continues to hammer drillers and producers hardest. As of last week, according to Baker Hughes, there are 687 fewer rigs drilling for oil than the peak of last October, now up to a 43% decline. Drillers, and those who found in-demand and high-paying jobs over the last five years exploring for oil and gas, are impacted the most. It is now speculated that up to 250,000 top-wage domestic oilfield jobs could be lost before this is over.

Dr. Weinstein attends and speaks frequently at conferences and is often quoted in the media. He said he gets this one all the time—is there an equilibrium price of oil where consumers still aren’t afraid to buy and drive their F-150s, while oil and gas companies aren’t having to lay down rigs and lay off good employees?

His answer: $70-$80 is the happy medium. “At that range, the shale plays in North America make sense and consumers would still be looking at lower costs.”

We’ve never been here before in American history. We’ve never seen a crude revival so prolific that it re-positioned America as a dominant force on the world’s oil stage, threatening a 40-year old dynasty of virtual monopolistic commodity price control. These are uncharted waters, and present a new and delicate balance between unregulated global supply versus fluctuating demand.

As observed by such industry experts as OPEC’s Secretary General, Abdulla Al-Badri and Continental Resources CEO Harold Hamm, if too much production comes offline, this could be setting the stage for a sharp price boomerang. When U.S. decline curves eventually catch up with fewer rigs, oil supplies should start to fall. If OPEC holds at its 2011 agreed 30.37 quota, with oil already allocated away from the U.S., could that set up an American supply shortage down the road?

As Al-Badri said in January, “if you don’t invest in oil and gas, you will see more than $200 oil,” referring to the greater than expected drop in new projects from offshore to shale.

That theory could be off-set somewhat by the recent news from Wood Mackenzie that there are approximately 3,000 wells that have been drilled but not fracked. This “fracklog” is, in essence, in-ground storage, waiting for better prices. That is production that could be activated faster than starting a new prospect from the ground up.

"This isn’t like the 1980’s—it’s not a full scale debacle,” Weinstein says. “What is a reasonable price for oil? There’s no such thing as a reasonable price for oil. To me, as an economist, the price of oil is going to be determined by supply and demand. If you’re a consumer, you want the lowest price possible. If you’re a producer, you want the highest price that supply and demand will generate.”

Clearly, at least for now, consumers are winning.

Source: http://oilprice.com/Energy/Oil-Prices/Consumers-Winning-With-Low-Oil-Prices-For-Now.html

Comments

D

Current news states the glut of oil continues and oil prices fell. Cheap gas for the middle class. We are finally catching a break. Only great thing to happen this year. ICE mileage creeps up and gas goes down.

gorr

IM saving money but I do not consume more as I know it is a waste fondamentaly, if there was a car of 500 mpg I will choose it and still try to drive it slow and hypermile it to get the absolute best mpg and look closely at gas prices along the road and fill-up at the lowest price station.

HarveyD

ICEVs mileage has been creaping backward for the last 2 to 3 months due to lower gas price and more 4 x 4 gas guzzling trucks on USAs roads.

That trend may stay as long as gas is below $4/GAL?

CheeseEater88

You have to remember what time of year it is, when also dealers slash prices, and that manufacturers released several new trucks, which created a vacuum in the market when they weren't being assembled until recently.

Truck month and all that fun stuff.

My brothers truck gets 24mpg average in the summer, its a 4x4, long bed, crew cab, and in the top end on the towing spectrum. He needs it for work, of course towing eats fuel. Power needs fuel though.

I've worked on a lot of cars that had less on the indicator. Even hybrids where it was sub 20mpg... always made me wonder.


I don't suspect any decent correlation between gas prices and average fuel economy. Heck, most people don't change driving habits when gas jumps $.40. Sure there is some fluctuation but not much, hardly a strong correlation.

I actually think there is more to do with inspired confidence than low gas prices. Yes they are related, but I don't think people are cross shopping hybrids and 3500 trucks, deciding to shop trucks because gas is a dollar cheaper than last year.

kalendjay

Quite likely the current extraction climate will favor overall displacement of oil by natural gas, including as a synthetic fuel feedstock. Cheap petroleum has forced cancellation of much LNG shipping and capital construction, but that can't be for long. Cheaper methane will eventually signal higher spreads between extraction and shipping, particularly to East Asia. The stakes are simply too high in most of the world to shift to risky obsolescent sources, rather than diversify through ocean and pipeline shipping with gas.

Note you will not read of a gas fracking bust in the Northeast. Gas is probably underwriting Marcellus oil extraction, if not continued exploration.

This summer we will see, as we see a ritualistic rise in gasoline prices at the pump.

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