Today’s average cost of gasoline for the U.S. is $2.198. Here in Arizona, the average price is $1.999, however, many retail stores are selling it for as low as $1.83 a gallon. [Source: GasBuddy.com]
Oil prices continued their downward trend today. Yesterday, NPR reported that the price of a barrel of U.S. oil (West Texas Intermediate) fell below $50. [Ref 1] Today’s quote from CNN’s Money shows the closing price on the New York Mercantile Exchange [Ref 2] for a barrel of light crude as $48.10. A few sources have even reported the selling price at just under $48 per barrel earlier today.
The last time oil prices were this low it was spring of 2009 and the U.S. was weathering the storm of the Great Recession.
What’s the Problem? Too much supply and less demand….basic economics. No one understands this better than the oil producing nation of Saudi Arabia, and for now, they have shown no interest in reducing their production output. “The supply model is also different today than it has been in the past,” argues Mohamed El-Erian, “and this fundamental shift may have long-lasting effects.” [Ref 3]
What’s the Solution? Good question. Stronger demand will help but may not be enough. U.S. demand for crude oil has declined and is tied to lower demand that started during the Great Recession. Also, the increase in natural gas from fracking has added to our energy mix and use. Some of this lost demand for crude in the U.S. has been picked up by developing countries like China and India.
Saudi Arabia is offering discounts on the oil that it sells to Europe. Discounts? Yes, discounts. It does appear that their end game is to weed out or crush their competitors for crude oil customers in the world’s market.
Cheap oil hurts both those in the drilling and fracking business. For those in the fracking business anything under $85/barrel begins to threaten profits, and anything under $60 begins to look like bankruptcy for a number of operations that are losing money because it cost more to frack or drill for natural gas than the price they can sell it for. While there is less pain at the pump, this has not been a pain free process for everyone involved in the energy supply chain.
Don’t forget to leave me a comment on what you are doing with those additional dollars that are not going into your gas tank.
[Photo Credit: Sydney Harbor Bridge, Australia, on New Year’s Day, 01.01.2015 – Photographer: Arva O. Lumpkin]
- Crude Oil Dips Under $50 A Barrel, A Price Last Seen in 2009, by Bill Chappell, January 5, 2014, http://www.npr.org/blogs/thetwo-way/2015/01/05/375196006/crude-oil-dips-under-50-a-barrel-a-price-last-seen-in-2009, Last viewed on 01.06.2015
- Commodities, CNN:Money, http://money.cnn.com/data/commodities/, 8:37 p.m. ET, Last viewed on 01.06.2015
- This Era of Low-cost Oil Is Different, by Mohamed A. El-Erian, in Bloomberg View, December 29, 2014, http://www.bloombergview.com/articles/2014-12-29/this-era-of-lowcost-oil-is-different, Last viewed on 01.06.2015