Wednesday Evening, I had to drive to my local Kroger Grocery and buy some Old El Paso Refried Beans because my wife decided to make Homemade Enchiladas for dinner.
(Trust me. The trip was worth it.)
Anyway, while I was there, I noticed that the price of gas at their Kwik Shop was $1.52.99 per gallon.
What happened to the “rebound” in gas prices, predicted by all of the “Pundits”, Professional and Internet, several months ago?
Back on December 7, 2015, the New York Times published the following explanation…
The oil industry, with its history of booms and busts, is in its deepest downturn since the 1990s, if not earlier.
Earnings are down for companies that have made record profits in recent years, leading them to decommission roughly two-thirds of their rigs and sharply cut investments in exploration and production. An estimated 250,000 oil workers have lost their jobs, and manufacturing of drilling and production equipment has fallen sharply.
The cause is the plunging price of a barrel of oil, which has been cut roughly by more than 60 percent since the June 2014.
Prices have recovered a few times last year, but a barrel of oil has already sunk this year to its lowest level since 2004. Executives think it will be years before oil returns to $90 or $100 a barrel, pretty much the norm over the last decade.
…Why has the price of oil been dropping so fast? Why now?
This a complicated question, but it boils down to the simple economics of supply and demand.
United States domestic production has nearly doubled over the last several years, pushing out oil imports that need to find another home. Saudi, Nigerian and Algerian oil that once was sold in the United States is suddenly competing for Asian markets, and the producers are forced to drop prices. Canadian and Iraqi oil production and exports are rising year after year. Even the Russians, with all their economic problems, manage to keep pumping.
There are signs, however, that production is falling in the United States and some other oil-producing countries because of the drop in exploration investments. But the drop in production is not happening fast enough, especially with output from deep waters off the Gulf of Mexico and Canada continuing to build as new projects come online.
On the demand side, the economies of Europe and developing countries are weak and vehicles are becoming more energy-efficient. So demand for fuel is lagging a bit.
Who benefits from the price drop?
Any motorist can tell you that gasoline prices have dropped. Diesel, heating oil and natural gas prices have also fallen sharply.
The latest drop in energy prices — regular gas nationally now averages under $2 a gallon, roughly down about 14 cents from a year ago — is also disproportionately helping lower-income groups, because fuel costs eat up a larger share of their more limited earnings.
Households that use heating oil to warm their homes are also seeing savings.
For starters, oil-producing countries and states. Venezuela, Iran, Nigeria, Ecuador, Brazil and Russia are just a few petrostates that are suffering economic and perhaps even political turbulence. Persian Gulf states are likely to invest less money around the world, and they may cut aid to countries like Egypt.
In the United States, Alaska, North Dakota, Texas, Oklahoma and Louisiana are facing economic challenges.
Chevron, Royal Dutch Shell and BP have all announced cuts to their payrolls to save cash, and they are in far better shape than many smaller independent oil and gas producers that are slashing dividends and selling assets as they report net losses. Other companies have slashed their dividends.
About 40 companies in North America have gone into bankruptcy protection.
What happened to OPEC?
A central factor in the sharp price drops, analysts say, is the continuing unwillingness of OPEC, a cartel of oil producers, to intervene to stabilize markets that are widely viewed as oversupplied.
Iran, Venezuela, Ecuador and Algeria have been pressing the cartel to cut production to firm up prices, but Saudi Arabia, the United Arab Emirates and other gulf allies are refusing to do so. At the same time, Iraq is actually pumping more, and Iran is expected to become a major exporter again under the recent nuclear deal.
Saudi officials have said that if they cut production and prices go up, they will lose market share and merely benefit their competitors. They say they are willing to see oil prices go much lower, but some oil analysts think they are merely bluffing.
If prices remain low for another year or longer, the newly crowned King Salman may find it difficult to persuade other OPEC members to keep steady against the financial strains. The International Monetary Fund estimates that the revenues of Saudi Arabia and its Persian Gulf allies will slip by $300 billion this year.
Is there a conspiracy to bring the price of oil down?
There are a number of conspiracy theories floating around. Even some oil executives are quietly noting that the Saudis want to hurt Russia and Iran, and so does the United States — motivation enough for the two oil-producing nations to force down prices. Dropping oil prices in the 1980s did help bring down the Soviet Union, after all.
But there is no evidence to support the conspiracy theories, and Saudi Arabia and the United States rarely coordinate smoothly. And the Obama administration is hardly in a position to coordinate the drilling of hundreds of oil companies seeking profits and answering to their shareholders.
When are oil prices likely to recover?
Not anytime soon. Oil production is not declining fast enough in the United States and other countries, though that could begin to change this year.
Demand for fuels is recovering in some countries, and that could help crude prices recover in the next year or two. There is now little or no spare production capacity to give the market a cushion in case of another crisis in a crucial oil-producing country.
The history of oil is of booms and busts followed by more of the same.
It all boils down to the Law of Supply and Demand.
As the article shows, gas prices rise and fall in response to worldwide economic conditions, production decisions made by oil-producing nations, and the investment decisions of oil companies.
President Barack Hussein Obama, despite what all of the “Smartest People in the Room” on Facebook and Internet Chat Boards may claim, has nothing to do with it.
In fact. this is happening, in spite of Obama’s failed push of failed means of “Alternative Energy.”
Remember Solyndra and the Chevy Volt?
Last February, The Institute for Energy Research posted the following interesting (and depressing) fact…
The Taxpayers Protection Alliance produced a report highlighting information from various studies on the U.S. subsidization of solar power. Over the last 5 years, taxpayers spent over $150 billion on solar power and other renewable projects, financing grants, subsidizing tax credits, guaranteeing loans, and bailing out failed solar energy companies, according to the Brookings Institute. According to the Government Accountability Office, federal government support for solar energy is massive, with over 345 different federal initiatives covering over 1,500 projects in 20 federal agencies–the Pentagon has 63 solar programs, the highest among the agencies, followed by the Interior Department, with 37 programs and the Energy Department (DOE) with 34 solar programs. For example, DOE’s Sunshot Initiative spends $270 million per year to “induce companies to lower production and installation costs associated with photovoltaic solar panel systems and reducing the price of solar power.” Last month the Energy Department announced an additional $59 million for “solar deployment plans.”[iii]
By now, entering the last year (Praise the Lord) under the reign of Emperor Obama the First, we were all supposed to be driving around in electric cars, with solar-powered windmills in our front yards.
Instead, I had to pay a $128 Water Bill last month, because the toilet needed a new $1.78 flapper.
But, I digress…
While the search for “Alternative Energy” has continued to be a Quixotic Liberal Government Quest, funded through the use of OUR money, the use of Fossil Fuels, despite all of Obama and the rest of the tree-hugging Environmental Whackos’ claims, continues to be a cheap, efficient energy source.
As I posted on Facebook and Twitter, yesterday…
America’s falling gas prices are brought to us, courtesy of Capitalism, not Government-Sponsored Marxist Theory.
So, Tree-hugging Environmental Whackjob Liberals…
Put that up your tailpipes.
Until He Comes,