Wednesday, 17 of October of 2018

Economics. Explained.  

Gasoline Prices

October 10, 2018

Gasoline prices at the retail level rose $0.03 in the week ending October 8 $2.90 per gallon.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $2.65. The Department of Energy expects national gasoline prices to average $2.79 this year.  

Spot prices for gasoline have risen in the past couple of weeks primarily because of the increase in crude prices.  See  below.

Crude prices recently  jumped to about $75 per barrel.   The run-up in crude prices represents a dramatic reduction in supply from Venezuela and a cut in crude oil production in Iran as sanctions are reducing the demand for Iranian crude oil.  The selloff in the stock market in recent days pushed oil prices back down to $71 per barrel with an expectation that higher short- and long-term interest rates will slow the pace of economic activity and, hence, push oil prices lower.  We are not so sure that will be the case and, at the same time, we are further concerned about a further reduction in supply from both Venezuela and Iran, particularly once the Iranian sanctions actually go into effect on November 4.

The number of oil rigs in  operation has  been fairly steady in recent months at about 1,050 thousand.  Thus,  higher crude oil prices are encouraging drillers to accelerate the pace of production.  If crude prices remain above $60 per barrel this year or higher, we should expect the number of oil rigs in operation, and production, to continue to climb.

Production has surged to 11,200 thousand barrels per day.  The Department of Energy expects production to average 10.7 million barrels this year but climb further to 11.8 million barrels in 2019.

To put those production levels in perspective, keep in mind that if U.S. crude oil production picks up as expected the U.S. will become the world’s largest oil producer by the end of this year.

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 $35 per barrel.  Six months from now that number will be lower still.

Oil inventories fell quickly for most of last year.    OPEC output was reduced at the same time that global demand picked up sharply.  Crude inventories have been sliding for a year and at 1,068 million barrels crude inventories are considerably lower the 5-year average of 1,116 million barrels.  With demand likely to slightly exceed supply through the end of this year, stocks may well decline slightly further in the near term.  That should exert additional upward pressure on oil prices.

The International Energy Agency in Paris (IEA) produces some estimates of global demand and supply.  The agency reports that demand picked up somewhat in recent months and supply edged lower as production constraints have restrained output.  As a result the IEA now estimates that demand will exceed supply by about 0.6 million barrels per day between now and yearend. The IEA noted that Venezuela has cut production there to a multi-decade low, and now there is the prospect of further a reduction in global oil supply by yearend stemming from curtailment of Iranian oil exports.  If the IEA estimates of supply and demand are correct not only will inventory levels edge lower between now and yearend, prices could climb somewhat.

Stephen Slifer


Charleston, SC*

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