“Can Someone Explain To Me Why Gas Prices Are So Low All Of A Sudden?”
The biggest factor is the law of supply and demand.
The world is awash in oil right now, particularly due to the U.S.’s fracking boom. Fracking – a method of extracting natural gas from shale rock deep below the earth’s surface – has boosted American oil production to its highest level in three decades.
Because there is so much oil on the market, the price is sinking. According to Venezuelan officials, the world has an oil surplus of 2 million barrels a day. The result is that current projections say oil’s drop in price will not end until at least 2017.
Yes, the U.S. is producing a lot of oil.
The U.S. pumps about 8.9 million barrels a day. Saudi Arabia, the world’s leader in oil production, produces nearly 9.6 million barrels a day.
But isn’t oil production and its prices run by OPEC, which is a cartel?
Yes, OPEC (Organization of Petroleum Exporting Countries) is a price-fixing cartel.
OPEC’s 12 member countries (which include Saudi Arabia, Venezuela, Iran, and Iraq) together control 60% of the petroleum traded internationally. Instead of competing with each other on the free market, these countries coordinate production and pricing in order to maintain steady profit for everyone in their club. Americans have always complained that this price fixing is unfair. (The U.S., by the way, is not part of OPEC so it’s high production competes directly with OPEC members.)
OPEC’s price fixing is one reason the price of gas is not considered a fair market price. Compare that to smart phones, for instance, where Apple and Samsung bitterly compete on products and price. If smart phones makers were like oil producers, Samsung and Apple would get together and set a price. Of course, such a move would constitute an illegal cartel under U.S. law, but, as far as the price of oil is concerned, the foreign countries in OPEC aren’t subject to U.S. anti-trust law.
But most think that OPEC’s influence on price is waning.
That’s evident from the organization’s decision last week that it would not reduce production. Here’s why that decision is important. Generally, when the price of oil sinks — as it has lately with the price of a barrel dropping to lows not seen since the Great Recession — OPEC members wil cut production. The logic here is that reduced production will reduce supply, thus boosting prices.
The fact that OPEC is doing the opposite right now shows that it feels it cannot push the price on its own. Instead, its hoping a price war — where prices keep dropping — will decimate U.S. producers because the price of oil won’t be high enough to make their expensive extraction operations profitable. Or, as Foreign Policy explained, OPEC is hoping to “kneecap” the U.S. oil boom.
This OPEC decision is a pretty big deal.
The Energy Minister of the United Arab Emirates — a member of OPEC — admitted to Bloomberg that OPEC countries no longer dictate price. If you remember your uncle railing about OPEC every Thanksgiving, that changes what we know about oil and the way the world works.
Will OPEC be able to kill U.S. oil production?
Experts think most U.S. oil producers can weather the price war and survive with oil selling for less than $70-a-barrel, which is where it’s trading right now. It’s still cheaper, however, to drill oil in Kuwait than it is to frack in the United States. Theoretically, there should be some low price at which American producers cannot compete. The question is how low the price must drop to drive U.S. frackers out of the market. One of the reasons no one knows that exact price is because extraction technologies keep getting cheaper. One estimate says that costs have fallen by 50% the last two years and might fall another 15% next year.
Is there anything else driving down the price?
Yes, the International Energy Agency (IEA) also cites weak demand for oil, especially in China, and the strength of the U.S. dollar as contributing factors.
How will the price of oil affect me in the United States?
If you have a car, you’ve probably noticed lower costs at the pump as gas prices have decreased 64 cents over the last few months. It also means that Americans have more money to spend on consumer goods this holiday season. This should also theoretically help air travelers as lower fuel costs make each flight cheaper for airlines. That’s all good!
So wait, fracking is awesome?
Depends on who you ask. Lower oil prices have nothing to do with the many concerns about fracking raised by environmentalists. Those worries still exist.
Additionally, low fossil fuel prices can make it harder for alternative energies to succeed. When oil is cheap, new energy sources like solar become less attractive and less competitive with gas. The result is that dirty fossil fuels remain entrenched against new, clean energy.