Why Gas Prices Plunged
The price of oil and gas has risen steadily for many years. Oil producing nations have conspired to keep supplies low and prices high. The world’s dependence on fossil fuels continued to increase.
What made for bad news for consumers at the gas pump meant good news for investors in gas and oil. Oil and gas have been almost sure routes to profit.
Unexpected Price Drops
Late in 2014, consumers were treated to a rare occurrence. The price of gasoline dropped at the pump. Not by just a few cents. The price fell more than $1 per gallon. Bewildered consumers were left shaking their heads. To the masses, the decrease seemed to come out of the blue with no reason behind it.
But as investors, we know there is always a reason for changes in price.
Part of the reason for the drop is the drop in prices for crude oil. In June of 2014, crude oil sold for around $115 per barrel. By late December, the price had fallen to under $60 per barrel.
OPEC members could not agree on production curbs. Curbs would have enabled OPEC to continue to charge high prices per barrel because of short supplies. Without the artificial rein on supply, the price fell.
Iraq and Libya continued to produce oil in spite of their internal political chaos. These two countries generate 4 million barrels a day in total.
The world has grown used to seeing turmoil in the oil producing countries. Political events and infighting don’t have as much power to disrupt oil markets as they once did.
Another factor: Countries have so far resisted the urge to stockpile oil while prices are low and supplies are high.
This restraint has enabled oil prices to remain low. It has stopped the price pressure of artificially created demand that stems from hoarding rather than need. In the oil crisis of the 1970s, hoarding contributed to shortages nearly as much as production restrictions did.
While current supplies have been ample, demand for oil has held steady or even fallen.
There is a global trend away from fossil fuels and toward other energy sources wherever possible. This has helped to keep demand low, or at least steady. Abundant supply and level demand leads to stable pricing.
Squabbles in the OPEC countries aside, the U.S. has quietly become the world’s largest producer of oil. The U.S. does not export its oil. Domestic supplies have enabled America to reduce its oils imports. Reducing dependence on foreign oil has been a key objective for many years,
The U.S. has also actively pursued energy independence in other ways. Alternative energy sources such as solar and wind have helped reduce reliance on oil imports. Fracking has added to supplies, although at a higher cost than oil produced by other methods.
Americans now drive fewer miles than they have in years. Their cars achieve better mileage. This has reduced consumer demand for gas.
Warm weather at the start of the winter season has so far reduced demand for heating oil. If the winter stays warm, especially in the Northern U.S. states, demand will not rise to normal levels. This will keep demand – and prices – low.
The Russian ruble has fallen, making it cheaper to buy Russian oil. Russia has little recourse to object to low prices because of the political and economic sanctions other countries imposed on it because of its actions in Ukraine.
Saudi Arabia has continued to export oil at low prices rather than lose market share. Saudi Arabia has one of the lowest per barrel production costs in the world. Even at reduced prices, they can easily afford to continue producing.
The result of this union of events is reduced demand and ample supply. This is a classic recipe for lower prices.
As the political climate in Russia and the Middle East evolves, the favorable economic conditions may not continue. When winter weather hits, heating oil demand will pick up. This will put pressure on oil supplies.
This pressure may cause prices to creep higher. Oil producing nations may soon decide to hold back production to ensure high prices, but for now they are producing at full throttle.
Is It Time to Invest In Oil?
Yes, it is the right time to invest in oil. The volatility and unpredictability of the political situations makes for some risk, of course. However, the current low price cannot endure for too long before oil producing nations step in to restore the premium pricing they have always enjoyed.
And enjoy the low prices at the gas pump while they last.