Thursday, 22 of February of 2018

Economics. Explained.  

Gasoline Prices

February 14, 2018

Gasoline prices at the retail level fell $0.03 in the week ending February 12 to $2.61.  In the low country of South Carolina gasoline prices tend to about $0.25 below the national average or about $2.36. The Department of Energy expects national gasoline prices to average $2.62 this year which is almost exactly where they are currently.

Spot prices for gasoline have fallen about $0.26 from their late January peak which suggests that pump prices should soon follow suit.

Crude oil prices are currently about $59.00.  The Energy Information Agency predicts that crude prices will average $58.28 in 2018.  With a huge increase in production the past two weeks (see below) and a small increase in inventories (see below) it is likely that crude prices will be relatively unchanged for the rest of the year.

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 975 thousand.  Thus,  higher crude oil prices are encouraging some drillers to step up slightly the pace of production.  If crude prices are relatively stable at about $58 per barrel, we should still expect the number of oil rigs in operation to increase gradually and further boost production.

Production in the past two weeks surged to 10,271  thousand barrels per day which continues to climb and further surpasses the previous record pace of production of 9,610 barrels per day set in 1970.  The Department of Energy expects production to average 10.6 million barrels this year and 11.2 million barrels in 2019.  As U.S. production continues to climb, crude prices should remain below $58 per barrel and could fall further.

How can the number of rigs rise slowly but production surge?  Easy.  Technology in the oil sector is increasing which allows producers to boost production while simultaneously shutting down wells.  A few years 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.

Oil inventories have fallen quickly for most of last year.    OPEC output has been reduced at the same time that global demand has picked up sharply.  While crude inventories have been sliding for a year, at 1.088 million barrels crude inventories are now roughly in line with the 2009-2014 average of 1,058 million barrels and in the past two weeks registered their first increase in a while.  Hopefully, increased U.S. production and inventory levels will cause crude price to retreat.

The International Energy Agency in Paris (IEA) produces some estimates of global demand and supply.  Note how demand picked up sharply in the second quarter of last year (the yellow line) and continued to climb through the end of last year.  Demand should climb further throughout 2018.  Note also that global demand far exceeded supply (the blue bars) for most of last year.  However the IEA believes that demand and supply are now roughly in balance.

OPEC’s production cuts, which are now in their second year, have been successful in reducing bloated inventories and lifted prices to $67 per barrel.  But OPEC could become a victim of its own success.  If prices remain at their current level of about $58 per barrel, the IEA warned that U.S. oil output is set for “explosive” growth this year  as U.S. producers re-open closed wells which would produce a wave of shale oil and potentially trigger another price decline like that experienced in 2014.  OPEC ministers recently voted to maintain the production cuts through yearend.  At some point crude prices should begin to fall.

Stephen Slifer


Charleston, SC*

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