Oil Continues Decline as New Rigs Come On Line

American drivers have had to deal with fluctuating gasoline prices for many years. However, in February 2016, the average price for all grades of gasoline dropped to slightly more than $1.87, according to the U.S. Energy Information Administration. Prices crept up over the next months, peaking at almost $2.47 per gallon in June before declining to $2.35 in July. For comparison, the average price for 2015 was $2.52 per gallon. Because gasoline prices are tied to the price of oil, most consumers can see evidence of trends in oil prices whenever they fill their tanks. Oil prices are continuing to decline, and one reason for the drop in prices is that new rigs are contributing to the supply. However, there are other factors involved, and there is no guarantee that prices will not rise later in the year.

How New Rigs Contributed to Declining Oil Prices

The price of oil is highly dependent on the ratio of demand to supply. When oil production levels are higher than the demand, prices drop. When production levels are lower than the demand, prices increase. Since its formation in 1960, the Organization of the Petroleum Exporting Countries, commonly referred to as OPEC, has attempted to stabilize — some say manipulate — prices by adjusting production. If prices dropped, OPEC would reduce production to increase prices.

Member nations of OPEC include Kuwait, Iraq, Saudi Arabia, Iran, Venezuela and the United Arab Emirates. OPEC nations account for the bulk of America’s oil imports. However, in recent years, American oil companies have begun to account for a higher percentage of oil. New rigs have begun producing, and petrochemical engineers have discovered new cost-effective methods of tapping into certain reserves that were once considered unprofitable. Hydraulic fracturing, more commonly referred to as fracking, is one example of new techniques currently being employed to increase domestic oil production. Tapping into the shale deposits is another example of changes in the American petroleum industry that have increased supply.

OPEC Faced Dilemma, Responded by Maintaining Production

In the past, OPEC has responded to decreasing oil prices by withholding production. However, as American oil production increased, OPEC was faced with a problem. American drillers, especially the frackers, were able to cut costs so quickly that domestic oil became less expensive than imports. Saudi Arabia, the leader of OPEC nations in the Middle East, made the decision in 2014 to keep production levels high and prices low. The theory was that flooding the market with cheap imported oil would make it too costly for American producers to compete. The plan did not work. As of August 2016, the price of oil per barrel was $42.70, according to Macrotrends.net, compared to $97.86 per barrel in August 2014.

Economic Concerns Have American Consumers Cutting Back

The economy continues to be a major concern for most American families. Historically, when gasoline prices are high during a period of economic uncertainty, consumers have responded by reducing their driving. They forego driving vacations, for example, or find alternatives to driving their personal vehicles. To illustrate, in 2011, the average price of gasoline was $3.57, according to the U.S. Energy Information Administration, and sales of road bikes rose 29 percent. The use of public transportation systems also increases when gas prices skyrocket. Reductions in demand increase the supply, typically leading to price decreases.

Lack of Storms in the Gulf of Mexico

Much of America’s oil production is in the Gulf of Mexico. As Bankrate points out, hurricanes and major storms can cripple production, leading to increases in oil prices. For example, gasoline prices increased more than 0.46 per gallon less than a week after Hurricane Katrina. In 2012, Hurricane Isaac reduced refining capacity by more than 1.25 million barrels per day. Only four hurricanes formed in the Atlantic in 2015; none came near to American rigs in the Gulf of Mexico. So far, 2016 has been similarly kind to offshore rigs.

Will Oil Prices Increase in 2017?

Making predictions is always risky, and oil analysts seldom are in complete agreement. However, according to a report from CNBC in June 2016, all of the analysts interviewed believed that oil prices would increase in 2016. There was no consensus on the amount of the increase, however.

Morgan Stanley predicts that average price per barrel in 2017 will be $51, increasing to $77 in 2019. Simmons & Co. International predicts $60 in 2017, increasing to $70 in 2018. Raymond James forecasts that American crude will hit $80 per barrel in 2017, declining by $5 per barrel over the subsequent two years. Only time will tell whose prediction proves to be the most accurate.

Why Oil Prices Matter

The price of oil affects consumers in a variety of ways. Gasoline prices are one of the most obvious effects, but high oil prices can also affect the cost of natural gas and heating oil. Furthermore, when the cost of transporting goods increases, prices for everything from groceries to lumber can increase as well. If you would like to learn more, visit our website, Personal Money Store.

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