Tuesday, 19 of February of 2019

Economics. Explained.  

Gasoline Prices

February 13, 2019

Gasoline prices at the retail level rose $0.03 in the week ending February 11 to $2.28 per gallon.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $2.03. The Department of Energy expects national gasoline prices to average $2.47 in 2019.

Spot prices for gasoline have fallen sharply in recent months primarily because of the decline in crude prices.

The selloff in the stock market that began in October pushed oil prices lower as investors believed that higher short- and long-term interest rates would slow the pace of economic activity and, hence, reduce the demand for oil.  At the same time  oil production around the globe surged in response to the higher prices and prices  sank to $45 per barrel.  But Saudi Arabia recently announced it was cutting production by 0.7 million barrels per day to boost prices and, as a result, oil prices have risen to about $54.

Meanwhile, U.S. production  has surged from 10,900 thousand barrels to 11,900 thousand barrels per day.  As noted above, the cut in oil production by the Saudi’s has boosted the  price of oil to about $54.  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 boost production.  The Saudi’s will not permit the U.S. to increase its market share of the global markets.

The Department of Energy expects U.S. production to climb 11% from 10.9 million barrels last year to 12.4 million barrels this year and 13.2 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 appears to have arrested the recent increase in crude stocks and gotten supply and demand back into better balance..    At 1,100 million barrels crude inventories are  roughly in line with the 5-year average of 1,116 million barrels.

The wild cards right now are production levels for Venezuela and Iran.  Venezuela’s oil output has been falling steadily for the past couple of years and is showing no sign of recovering.  Iran is different.  The Iran sanctions went into effect in early November.  Iranian production has not fallen too sharply yet, but the U.S.’s  goal is to reduce exports (and, hence, production) close to zero.  Thus, as we go forward Iranian output could fall sharply and counter much of the recent oversupply.

Stephen Slifer

NumberNomics

Charleston, SC


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