U.S. Oil Carries More Weight in the Global Market
In mid-September, global oil prices fell to the lowest level in more than two years, despite geopolitical pressures in Russia and the Middle East. The global benchmark for crude oil — Brent —dropped 16% from mid-June highs to less than $98 per barrel.1
More than 11 million barrels of crude oil from U.S. fields are being delivered to the global market every day, which is one reason why prices have fallen. In the first quarter of 2014, the United States surpassed Saudi Arabia and Russia to become the world’s largest oil producer.2
Oil prices (which are traded on world markets) are especially sensitive to geopolitical crises and supply shocks, and retail gas prices are tied directly to the cost of crude oil. But growth in the oil supply has been outpacing worldwide demand.
Here’s a closer look at the factors that can cause crude oil and gasoline prices to rise and fall.
Shale Boom Leads to Glut
Vast reserves of domestic oil (and natural gas) are newly accessible through a process called hydraulic fracturing, or “fracking.” A pressurized mixture of water, sand, and chemicals is used to extract energy from shale rock layers as deep as a mile or more below the Earth’s surface.
Oil companies are using new methods such as horizontal drilling and fracking to tap into shale formations in North Dakota, Texas, and elsewhere. In just the last two years, Texas has doubled its oil production.3U.S. crude oil production reached a 28-year high in September.4
Slowing gross domestic product (GDP) growth in China and continuing economic weakness in Europe have reduced oil demand. In mid-September, the U.S. Energy Information Administration, the International Energy Agency, and the Organization of the Petroleum Exporting Countries (OPEC) all lowered their projections for global oil-demand growth.5
Watching the World Market
Some analysts believe that the glut, and a period of weaker oil prices, could last until Chinese GDP growth and oil demand pick up speed.6
However, OPEC — a collective of 12 oil-producing nations in the Middle East that produces more than 40% of world crude oil — has the power to influence the price of crude.7 Abundant supplies could prompt the cartel to cut its oil production target for 2015 and beyond.
If oil prices remain low for too long, the U.S. oil industry could also reduce investment in new wells and slow production.
From Crude to Your Car
The price that drivers pay at the pump is also affected by refinery capacity, seasonal fuel formulations, and consumer demand. Regional prices also vary based on such factors as state standards, local competition, and taxes.
Because the per-barrel price of U.S. oil (West Texas Intermediate crude) is trading below the global benchmark (Brent), U.S. refiners can sell petroleum products overseas at lower prices than their competitors. Thus, there is plenty of profit incentive to operate at full speed. In September, U.S. refineries were running at 93.9% of capacity, the highest level since August 2005.8
Consumers Drive the Economy
Over the summer, American drivers enjoyed the lowest gasoline prices in four years.9 When gasoline is cheaper, many households have more money to spend on other types of goods and services — and consumer spending accounts for about two-thirds of U.S. GDP.10 When businesses spend less on petroleum products for fuel or raw materials, they tend to have more capital to invest in equipment and employees.
The United States currently imports only 28% of the petroleum it uses, down from 60% in 2005.11 Over the last few years, increased oil production in North America has offset supply disruptions caused by unrest in the Middle East, helping to stabilize prices.12 American consumers might have faced higher gas prices and tougher economic conditions had this not been the case.
Could lower fuel prices cause U.S. economic growth to accelerate? The answer may depend on whether fuel prices stay low for a while or shoot back up relatively soon. Global forces will continue to affect the price of fuel, but becoming more energy independent may allow the United States to exert more influence over its own economic destiny.
1, 5) The Wall Street Journal, September 12, 2014
2) Bloomberg.com, July 4, 2014
3) The New York Times, August 28, 2014
4) Businessweek, September 17, 2014
6, 11–12) Businessweek, May 8, 2014
7) U.S. Energy Information Administration, 2014
8–9) The Wall Street Journal, September 11, 2014
10) U.S. Bureau of Economic Analysis, 2014
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