April 26, 2017
Gasoline prices at the retail level rose $0.01 in the week ending April 24 to $2.45 per gallon. In the low country of South Carolina gasoline prices tend to about $0.25 below the national average or about $2.20. The Department of Energy expects national gasoline prices to average $2.39 this year — almost exactly where they are currently.
As the price of gasoline declined the economy got a tailwind. However, oil prices today are 13% higher today than they were a year ago. Hence, the tailwind effect on the economy has run its course but has not yet turned into a headwind.
Crude oil prices are currently about $50.00 mark. The Energy Information Agency predicts that crude prices will average $52.24 in 2017. As crude oil and gas prices have leveled off the underlying inflationary pressures have become more apparent.
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 857 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. The Department of Energy expects production to average 9.0 million barrels per day in 2017. We seem to be on track for close to that estimate.
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 35% in the past twelve months. Put another way, a year ago some frackers could not drill profitably unless crude oil prices were about $70 per barrel. Today that number has declined to about about $44 per barrel. Six months from now that number will be lower still.
While oil inventories gradually declined for most of 2016 the recent increase in production has caused inventory levels to rebound. While oil prices might remain firm through midyear, the excessive amount of available crude will ultimately push gas prices lower.
In December OPEC agreed to cut production, but it remains to be seen how meaningful the cut will turn out to be. In the past, various countries would begin to cheat and the whole thing would unravel. Furthermore, as oil prices rise U.S. producers will return in droves and prices will once again begin to fall.