Saturday, June 2, 2018

Price Of Gas

                                                                                                written 27 May, 2018
                                                                                                published 2 Jun 2018

            The price of gasoline is going up.  My standard of reference is Chevron regular, at $3.59/gallon last time I looked.  The increase is caused by global pressures on oil prices, due to physical, economic, and political forces.  Last week the price for benchmark Brent crude oil hit $80/barrel, the first time since 2014.
            The global economic recession after the 2008 crash lowered the demand for oil, but production remained the same, creating a worldwide glut, which depressed prices.  This was good for the consumer, but oil producers were hard hit.  For decades, discovery of new oil has not kept pace with depletion of existing oil fields.  The search for new oil is expensive, and it can take years to develop a new field.  This costs more energy and money because easily accessible oil has been found and, in many cases, already depleted.  The new operations lose money when market prices are low, but loans borrowed to finance the development must still be paid, so production continues.
            Fracking is a tertiary extraction method to get the last drops of oil out of the ground.  It is expensive to drill the wells and pump sand to fracture the rock so oil can be retrieved.  Individual deposits are relatively small and well production drops off within a few years, so new wells must be constantly drilled.  The oil industry claims this can go on for decades, but sceptics point out that current output comes from drilling the productive "sweet" spots, which are now mostly developed.  Heavy investment in fracking generated a boom in US oil production, but at a loss of $250B to date.  Higher oil prices are required to make fracking profitable.
            Few global oil producers make a profit with low oil prices.  Saudi Arabia organized an OPEC production slowdown in 2016, to reduce global oil supply.  This slowdown and growing oil consumption due to increased global economics, depleted the oversupply and oil prices rose.  While higher prices are good for oil producing countries and corporations, they are not good for the global economy.  Oil is a fundamental part of the economy and if it is too expensive, the economy can't function.  Sudden changes in oil pricing can be economically disruptive. 
            By June 2008, the price of oil had doubled to $160/barrel over the previous 18 months.  The US economy was fragile, over extended with massive debt in the subprime housing market, and the rapid increase in oil prices popped the bubble.
            There are similar global conditions today.  A recent column in the UDJ pointed out the precarious condition of the Argentine economy.  The global economy is connected, so a collapse in one place affects the whole world.  Real estate prices in the US are approaching pre-crash levels, almost doubling in the last 6 years, while wages are stagnant, and there is increasing debt in sub-prime auto loans.  The Chinese economy was booming in 2008, which helped the global economy recover, but China is growing more slowly today.  In 2008, the Fed lowered interest rates and threw trillions of dollars into the economy to prevent a depression.  Interest rates today are already low, and the national debt is more than twice as large, so the options are reduced.
            2018 global oil consumption is 99 million barrels/day.  With little stored supply, the market is tight, and reduction in production due to geopolitics, can cause abrupt increases in prices.  The decline of the Venezuelan economy has reduced their oil production by half, with risk of a compete production collapse.  The US withdrawal from the Iran nuclear treaty and re-imposition of economic sanctions, will reduce Iranian production.  Moving the US embassy to Jerusalem further inflamed tension in the area.  The threat of an Israeli/Iranian war is a real concern, which would likely reduce production in the entire region.  Any of these situations could cause a sudden reduction in oil supply, causing a sharp rise in prices, and renewed economic upheaval.
            We are stuck with the fact that oil prices the consumers can afford are too low for oil producers to make a profit, and prices that profit the oil industry are too high for our debt-ridden economy to carry.