The 60 percent drop in the price of crude oil over the last seven months has predictably fueled a corresponding plummet in U.S. gasoline prices. But before assuming that the current sub-$2 cost for a gallon of regular at some Charleston area pumps is a bargain you can keep counting on, heed long-term economic reality — and oil-cost history.
One obvious factor behind the steep gas-price drop is a calculated increase in oil production by members of the Organization of the Petroleum Exporting Countries, including Saudi Arabia. Understandably alarmed by the extraordinary North American fracking boom that has transformed the world oil market and eased American dependence on foreign energy, OPEC nations have a heavily vested interest in making that process unprofitable.
As a bottom-line consequence, fracking investors are increasingly experiencing their own sense of alarm.
The London Telegraph reported last week: “OPEC is betting that by forcing prices lower — Brent oil has lost 60 percent of its value since June last year — it will force drilling rigs to shut down in North America, where the growth in output is partly blamed for causing a global oversupply.”
Also according to The Telegraph, an OPEC release referring to North American drillers pointed out: “In general, with rig counts declining in major tight crude production regions, producers are likely to cut back on drilling activity, particularly in the fringe areas, as capex [capital expenditure] is being reduced, which will ultimately reduce growth rates, albeit with a time lag.”
Translation: Oil producers are engaged in a high-stakes clash of supply-and-demand wills. And after that “time lag,” reduced production rates will inevitably push the price of oil upward.
Indeed, “fuel price gauger” Gas Buddy recently projected the average U.S. price for a gallon of regular gas will rise to $3 before summer.
That would be welcome news to frackers and their backers, who apparently aren’t the only folks feeling the squeeze of the oil price collapse.
Tuesday’s Wall Street Journal reported that attorneys for a BP subsidiary plan to cite the low price of oil while appealing for a reduction in federal fines (currently a total of $13.7 billion) for the massive 2010 oil spill at the Deepwater Horizon rig in the Gulf of Mexico. J. Andrew Langan, a lawyer representing BP Exploration & Production Inc., told the Journal that the company “should be subject to a Clean Water Act penalty at the lower end of the statutory scale.”
Just don’t hold your breath waiting for BP lawyers asking for those fines to be raised if — make that when — the price of oil goes back up.
Don’t assume, either, that buying a gas guzzler suddenly became a smart move.
Meanwhile, though, enjoy the amazingly low gas prices while they last.
Just don’t expect them to stay down for long.