A rapid decrease in gasoline prices over the past six months has been a welcome relief to Pocahontas County households – especially those on tight budgets. Gasoline prices in the U.S. declined for 123 straight days, but local motorists may have noticed the prices reversing direction and inching back up.
What caused the price of gas to fall so quickly and will it go up as fast as it came down?
Although gas prices are subject to several variable factors, the Energy Information Administration (EIA) projects that gasoline prices will not rise above $2.50 a gallon in 2015. See the accompanying chart for the EIA’s forecast for crude oil and gas prices for this year.
Why did the price of gas fall so quickly? The primary cause is an increased supply of crude oil on the world market. The glut of crude oil is due to several factors.
Oil production in the U.S. has steadily increased during the last four years, due to a surge in production from shale oil, or “tight oil” as it’s known in the industry. Tight oil is extracted using
horizontal drilling and hydrofracturing techniques similar to those used to extract shale gas. At the beginning of this year, U.S. crude oil production stood at more than 9 million barrels per day (bpd), with more than one-third coming from tight oil wells. This level of crude oil production has not been seen in the U.S. since 1973.
Tight oil fields in the U.S. include the Eagle Ford and Barnett shales in Texas, the Bakken shale in Montana and North Dakota, and the Niobara shale in Colorado and Wyoming. The gas-producing Marcellus shale in the Appalachian region is not a tight oil producing formation.
In addition to increased output in the U.S., crude oil production in Russia, Libya and Iraq has been high, putting downward pressure on gas prices.
The Organization of Petroleum Exporting Countries will normally respond to low oil prices by limiting production. But powerful Saudi Arabia, the world’s largest oil exporter, has recently blocked moves to cut OPEC production, currently 30 million bpd. The Saudis are believed to be tolerating low oil prices in order to harm the economy of its bitter rival, Iran. However, with a new monarch taking the throne in Saudi Arabia, it’s anyone’s guess how long the kingdom will continue the strategy that benefits American consumers.
High oil production joined with decreasing demand to jolt gas prices downward. Economies in Europe and Japan have been somewhat stagnant, and the huge Chinese economy is slowing down. The strong dollar also helped push oil prices down.
So, why has the price of gas started creeping upward?
According to the American Automobile Association (AAA), this is typically the time of year when refineries shut down a portion of their operations to perform maintenance. Reduced output from refineries reduces supply and increases cost.
“Many drivers are noticing an uptick in gas prices for the first time in months,” AAA spokesman Avery Ash said in a press release. “It is typical to see gas prices increase this time of year due to refinery issues, yet hopefully the consumer impact will be less problematic given how low prices are today.”
At the same time, U.S. crude oil producers are expected to cut production due to lower prices, which reduces or eliminates their profit margin at expensive horizontal wells.
Some experts predict that lower prices will cause Americans to use more gas, which will increase demand and push prices upward. However, if consumers conserve and drive as if gas cost $4 a gallon, prices will stay closer to $2 a gallon for a longer period of time.