Saturday, 21 of October of 2017

Economics. Explained.  

Gasoline Prices

October 18, 2017

Gasoline prices at the retail level fell $0.01 in the week ending October 16 to $2.49.  Gas prices jumped about $0.30 per gallon in early September  as Hurricane Harvey temporarily shuttered about 20% of the country’s refining capacity.   However, those plants have largely re-opened.  In the low country of South Carolina gasoline prices tend to about $0.25 below the national average or about $2.24. The Department of Energy expects national gasoline prices to average $2.39 this year.

Crude oil prices are currently about $52.00.  The Energy Information Agency predicts that crude prices will average $49.69 in 2017.  As crude oil and gas prices have leveled off .underlying inflationary pressures have become more apparent.  While subdued at the moment, wages pressures are apparently beginning to escalate.  At the same time producers — both manufacturing and non-manufacturing firms — are having to pay considerably higher prices for their inputs.  It appears that upward pressure on the inflation rate has finally begin to emerge.

The number of oil rigs in service dropped 79% to 404 thousand  after reaching a peak of 1,931 wells in September 2014.  However, the number of rigs in operation has actually rebounded in recent months to 936 thousand.  Thus,  higher crude oil prices are encouraging some drillers to step up slightly the pace of production.

While the number of oil rigs in production has been cut by 79% between late 2015 and the middle of last year, oil production has declined much less than that.  Since that time the rebound in oil prices has encouraged oil firms to step up the pace of production.  Production had been at a 9,530 million barrels per day prior to Hurricanes Harvey and Irma  The storm caused production to temporarily drop to 8,400 thousand barrels.  It should rebound quickly.  We should match the record pace of production of 9.610 barrels per day by early next year.  The Department of Energy expects production to average 9.2 million barrels per day in 2017 and 10.0 million barrels next year.

How can the number of rigs go down but production be relatively steady?  Easy.  Technology in the oil sector is increasing rapidly which allows producers to boost production while simultaneously shutting down wells.  For example, output per oil rig has increased by 25% in the past twelve months.  Put another way, a year ago some frackers could not drill profitably unless crude oil prices were about $65 per barrel.  Today that number has declined to about about $48 per barrel.  Six months from now that number will be lower still.  Recent productivity numbers for September aand October have been distorted by the drop-off in production associated with Hurricanes Harvey and Irma but they will rebound in the next month or two.

While oil inventories gradually declined for most of 2016 the increase in production earlier this year caused inventory levels to climb to a record high level in February.  Since that time inventory levels have been steadily shrinking.  We know that OPEC output has been reduced, and that its cutback has been partially offset by a pickup in U.S. production.  But inventories keep falling.  The conclusion is that global demand has picked up sharply.  That is consistent with the upward revisions to GDP growth recently released by the IMF which shows projected growth in 2011 of 3.6% and 3.7% growth in 2018 which would be the fasted growth rate since 2011.

The International Energy Agency produces some estimates of global demand and supply.  Note how demand picked up sharply in the second quarter (the blue line) and is projected to rise further in the second half of the year.  Note also that global demand currently exceeds supply (the blue line compared to the bars). That has not been the case for the past several years.  Furthermore, demand and is projected to continue to exceed supply through the end of this year.  Hence, the recent upward pressure on oil prices.  If they persist, U.S. producers will re-open closed well and, at some point, OPEC will begin to boost its output.  Hence, oil prices are unlikely to rise too much farther.

Stephen Slifer

NumberNomics

Charleston, SC


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