Supply matters. The impact of the U.S. energy revolution on global supply, with real benefits reaching consumers, is seen we head into the Labor Day weekend. The U.S. Energy Information Administration (EIA) reports the U.S. average retail price for gasoline on Aug. 25 was the lowest price on the Monday before Labor Day since 2010:
EIA explains:
The recent decline in gasoline prices largely reflects changes in crude oil prices. In June of this year, the Brent spot price reached its year-to-date high of $115/barrel (bbl), then fell to $102/bbl on August 22. Current Brent prices are below their August average level over the past three years, which ranged between $110/bbl and $113/bbl.
This parallels another EIA report, crediting the surge in U.S. crude oil production with a more stabilized global crude market:
Record-setting liquid fuels production growth in the United States has more than offset the rise in unplanned global supply disruptions over the past few years … U.S. liquid fuels production, which includes crude oil, hydrocarbon gas liquids, biofuels, and refinery processing gain, grew by more than 4.0 million barrels per day (bbl/d) from January 2011 to July 2014, of which 3.0 million bbl/d was crude oil production growth. During that same period, global unplanned supply disruptions grew by 2.8 million bbl/d. U.S. production growth, the main factor counterbalancing the supply disruptions on the global oil market, has contributed to a decrease in crude oil price volatility since 2011.
More simply, supply matters. Because crude oil is traded globally, every additional barrel of U.S. production going into that market has impact, as market analyst James L. Williams explained:
“The laws of supply and demand do work, even if it’s not as obvious as it should be. If we produce more, the price will be lower than it would have been otherwise. … I don’t care who increases oil production, it will decrease oil prices.”
Put the pieces together: Increased U.S. supply works to stabilize the global price of crude, the chief cost factor in pump prices – and/or puts downward pressure global crude prices, as EIA and others note. AAA:
In recent years motorists have seen geopolitical headlines trigger higher global crude oil prices and ultimately higher prices at the pump; however this has not been the case this summer. In recent weeks, oil markets have largely shrugged off reports of violence and tensions overseas and have instead moved steadily lower as analysts have assessed the potential for a disruption in oil supplies to be limited. The easing of global crude prices has been a driving factor behind the falling retail gasoline prices across much of the country.
The New York Times:
The reason for the improved economics of road travel can be found 10,000 feet below the ground here, where the South Texas Eagle Ford shale is providing more than a million new barrels of oil supplies to the world market every day. United States refinery production in recent weeks reached record highs and left supply depots flush, cushioning the impact of all the instability surrounding traditional global oil fields. So oil prices — and those at the pump — are easing.
Left, the newspaper charts crude oil production trend lines for the world’s major suppliers. Look at the skyrocketing U.S. line, largely owing to dramatic increases in unconventional energy production with advanced hydraulic fracturing and horizontal drilling. The Times:
Most of the price of gasoline is determined by the world price of crude, now hovering around $100 a barrel. Turmoil in major producer countries like Iraq and Libya does matter. But the new source of American energy means more supply has been added to global markets — almost the exact amount that has been taken off the market at times because of unrest in the Middle East and Africa over the last five years. “If it weren’t for that, we would be seeing $200 a barrel oil or higher and $7 to $8 gasoline prices,” said Scott D. Sheffield, chief executive of Pioneer Natural Resources, one of the most aggressive producers in the Eagle Ford shale field. “It would be another shock to the world economy at a time when we don’t need it.”
So we circle back to the fuel outlook for the coming holiday weekend – again, with prices lower than they’ve been since 2010. America’s energy revolution is benefiting consumers. The Times:
“It’s a relief,” said Tom Kloza, chief oil analyst at GasBuddy.com, who estimates that American consumers collectively saved as much as $700 million a week through much of August compared with last year. “We can thank Texas, North Dakota and Canada.”
Supply matters!
By Mark Green
Originally posted August 29, 2014
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