Monday, 22 of April of 2019

Economics. Explained.  

Gasoline Prices

April 17, 2019

Gasoline prices at the retail level rose $0.08 in the week ending April 15 to $2.83 per gallon.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $2.58. The Department of Energy expects national gasoline prices to average $2.60 in 2019, slightly lower than they are currently.

The selloff in the stock market that began in October pushed oil prices lower as investors believed that global GDP growth would slow and, hence, reduce the demand for oil.  Oil prices fell to a low of about $45 per barrel.   But output in Venezuela and Iran has been falling and Saudi Arabia has cut production twice this year.  As a result, oil prices have rebounded to about $64.  The Department of Energy expects crude prices to average $58.80 this year.

The  crude oil output in both Venezuela and Iran has declined markedly.  Venezuela’s oil output has been falling steadily for the past couple of years and is showing no sign of recovering.  In fact, the blackouts in Venezuela significantly curtailed production in March.  The Iran sanctions went into effect in early November.  Iranian production has since fallen sharply.  The U.S.’s  goal is to reduce exports (and, hence, production) close to zero.  The contraction in production in these two countries, combined with voluntary production cuts in Saudi Arabia are the major reasons why oil prices have recently been rising.

Meanwhile, U.S. production  has surged from 10,900 thousand barrels to 12,100 thousand barrels per day.  As noted above, the cut in oil production by the Saudi’s combined with reduced production in Venezuela and Iran has boosted the  price of oil to about $64.  The Saudi’s would like it to climb to $90, or at least $85, per barrel to ensure that their budget deficit remains in balance.  That is not going to happen.  As prices rise U.S. drillers will quickly boost production.  The Saudi’s will not permit the U.S. to steadily increase its market share of the global markets which has already been falling and is  likely to decline farther as the year progresses.

The Department of Energy expects U.S. production to climb 14% from 10.9 million barrels last year to 12.4 million barrels this year and 13.1 million barrels per day in 2020.  The U.S. became the world’s largest oil producer in March of last year and the gap between U.S. production and that of Russia, and Saudi Arabia will widen in 2019 and 2020.

The cut in Saudi production combined with reduced production in Venezuela and Iran  appears to have arrested the recent decline in crude stocks and gotten supply and demand back into better balance..    At 1,104 million barrels crude inventories are  roughly in line with the 5-year average of 1,116 million barrels.

Stephen Slifer

NumberNomics

Charleston, SC


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