Gas Prices Are Still Low

Gasoline is getting more expensive, but it's not as bad as it could be.  Now that the world's economy is in full recovery mode, with the Trump economy leading the way, the world's demand for oil is rising strongly once again.  With oil pricing governed in large part by the age-old fundamental of supply and demand, crude oil has recovered from its historic crash of 2014-2017 and has risen in line with the increased demand and strengthening economic activity.

This is actually a good thing, since the bottom-feeding low oil prices of the past few years have been a mirror of the lackluster economic conditions that existed around the world in that time period.  The key is achieving the desired balance: oil pricing that is high enough to indicate that general economic conditions are good and high enough for oil-producing entities to be profitable and thus maintain or increase their exploration, extraction, and refining activity, but low enough so as not to become a major drag on the disposable incomes of individuals and the companies who employ them.  Considering both consumer psychology and actual economic impact, that means West Texas Intermediate (WTI) oil pricing no higher than the mid- to upper $70s/bbl, which translates into a nationwide average retail gasoline price of around $2.85/gal.  There is an undeniable negative emotional reaction when gasoline breaches the $3.00/gal barrier.  As long as gasoline pricing begins with a "2," most people consider it a non-factor.

Interestingly enough, even big swings in gasoline pricing don't amount to a particularly big impact in the monthly budget of the average middle-income household.  Making the justifiable assumptions of 15,000 miles driven per year and a car that gets 25 miles per gallon, even a 50-cent rise in gas pricing means only an additional $50/month for two cars.  While $50/month is not nothing, it's not exactly a huge amount in the actual monthly budget of most middle-income households.  In all honesty, the difference between $2.35/gal and $2.85/gal is more psychological than anything else.

The big takeaway from the recent rise in oil and gasoline pricing is that the rise has not been as sudden and dramatic as most rises have been in the past.  The reason is that recent increase American oil production – led by the shale boom – has added so much oil onto the world's market that major changes in world demand and usage do not affect the overall supply as much as they once did, hence price swings are less volatile.

The geopolitical factor inherent in oil pricing is totally independent of production and supply concerns.  Regardless of the rig count, the amount of oil stockpiled in inventory, proven reserves in untapped fields or any other rational fact, if Iran or North Korea or some other bad actor behaves in a malevolent fashion, the oil market feels the jitters, and pricing skyrockets.  Likewise, when natural weather conditions cripple refining or transportation capacity (as was the case with the extreme hurricane activity in the U.S. in the summer-fall of 2017), oil pricing will rise precipitously.

Absent these unpredictable geopolitical or weather-related influences, it's easy to see why even the extremely favorable current world economic climate and higher oil demand have only pushed oil and gasoline pricing up modestly.  It comes down to one word: fracking.

Ever since the hydraulic fracturing ("fracking") technological revolution unlocked the huge oil reserves in the continental U.S. shale oil fields, previously trapped and unreachable, world crude oil pricing has become less volatile and less susceptible to huge seasonal swings.  The U.S. is now producing more oil than it has in over 30 years and, by many estimates, will soon overtake Saudi Arabia as the world's no. 2 oil producer (behind only Russia).  As seen in this chart, U.S. oil production has risen from a low of around 5M bbl/day as recently as 2008 to the current level of nearly 11M bbl/day.  This dramatic rise in American production has completely reshuffled the deck and adds enough oil to the world's supply that no one country's oil production (or politically motivated reduction in production) affects the overall pricing and supply-demand equation to anywhere near the same degree as recently as a decade ago.  In times past, the OPEC nations could conspire to extort the United States by manipulating their oil production as either punishment or reward for the foreign policy moves of our country.  Not anymore.  OPEC is a factor but not the factor.

The greater stability in world oil pricing as a result of increased U.S. production is clearly evident in the more stable and lower U.S. gasoline pricing, even in this period of favorable economic activity, during this summer driving season when prices typically spike close to a dollar higher than the winter lows (primarily due to increased driving demand and strained gasoline refining capacity as the refineries switch over to EPA-mandated lower-emission "summer" blends).  As recently as four years ago, the average price for gasoline in the U.S. was over $3.70/gallon – and that's not even adjusting for inflation (it would be around $4.00 in 2018 dollars).  Yet the national average as of July 10 was only $2.85/gal.

With oil-based fuel likely to remain a major source of the world's energy for the foreseeable future, increased U.S. production should be encouraged and applauded, not demonized.  Our oil production contributes directly to a more stable, predictable world economic climate, and our advanced exploration and extraction technology results in a far cleaner, less polluting production process than in less developed oil-producing countries.

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