Sunday, 25 of June of 2017

Economics. Explained.  

Gasoline Prices

June 21, 2017

Gasoline prices at the retail level fell $0.05 in the week ending June 19 to $2.32 per gallon.   In the low country of South Carolina gasoline prices tend to about $0.25 below the national average or about $2.07. 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 1.5% lower 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 $44.00 mark.  The Energy Information Agency predicts that crude prices will average $50.68 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 933 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 and at 9350 million barrels it is now only about 3% lower than its June 2015 peak pace of production which was 9,610 thousand barrels.  The Department of Energy expects production to average 9.3 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 27% 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 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 shrinking.  We know that OPEC output has been reduced, but its cutback has been partially offset by a significant pickup in U.S. production.  The other thing thing that could reduce inventory levels is strong demand which, in this case, seems consistent with an apparent quickening of GDP growth not only in the U.S. but around the world.

Stephen Slifer

NumberNomics

Charleston, SC


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