Cheap gas prices may last well into 2016, perhaps longer
DALLAS _ Oil prices have been
lower for longer than expected. Now, with OPEC’s decision to keep pumping at
current levels, analysts expect oil to remain relatively cheap well into 2016
and maybe longer.
That, of course, is good news for consumers and
fuel-guzzling industries like airlines, but oil producers are being squeezed
and thousands of workers in the oil patch have been laid off.
The price of a barrel of oil fell Monday to $37.65, a nearly
seven-year low. Energy stocks, from giants Exxon and Chevron down to independent
producers, took a beating.
What’s causing the upheaval? Simply put, supply and demand
are out of synch, and that’s causing ripples across economies, creating winners
and losers.
ROBUST SUPPLY, SO-SO DEMAND
U.S. oil production rose from 5 million barrels a day in
2008 to an estimated 9.3 million barrels a day in 2015. That unexpected surge,
coupled with OPEC’s unwillingness to cut production, left the world awash in
oil and sank prices. Supply is outpacing demand by about 1.4 million barrels a
day, according to Judith Dwarkin, chief economist at ITG Investment Research.
Meanwhile, economic growth has been slower than expected,
undercutting demand for energy. China’s economy has slowed, Japan is in
recession, and Europe continues to struggle. The U.S. economy is growing, but
more-efficient cars have blunted the need for more fuel.
The U.S. government predicts U.S. production will drop 6 per
cent next year as oil companies curtail unprofitable projects. Globally, “it
could take well into 2017 to work off the surplus inventory,” Dwarkin said.
HEYDAY FOR CONSUMERS
Motorists see the effect of cheaper crude every time they
fill up. According to AAA, the national average price for a gallon of regular
gasoline on Monday was $2.03 and should soon drop below $2 for the first time
since 2009. Gas is already below $2 at nearly two-thirds of the nation’s
130,000 gas stations, according to the price-watching site GasBuddy.com. A
gallon of diesel is more than $1 cheaper than at this time last year,
benefiting shippers.
Tom Kloza, chief oil analyst for Oil Price Information
Service, says the nationwide average could drop as low as $1.75, before turning
around in the spring, possibly going as high as $2.75 in time for driving
season.
All that pocket change and low interest rates are leading
many consumers to splurge on new cars, particularly bigger ones. SUV sales have
jumped 45 per cent since November 2012, when gas was around $3.63 a gallon. But
car-buying in key oil states has tailed off, according to IHS Automotive. New
vehicle registrations in Texas and North Dakota rose just slightly this year
through September, after outpacing the nationwide growth in the boom oil years.
Saving on gasoline could improve shoppers’ holiday spirit.
Cheaper gas “frees up money that could be spent elsewhere, so that’s a plus for
holiday shopping,” said Scott Hoyt, senior director of consumer economics at
Moody’s Analytics.
Cheap oil also translates to lower heating bills. The
average household using heating oil will spend $1,360 this year, $493 less than
last winter, according to the EIA.
Big airlines such as American, United and Delta burn
billions of gallons of jet fuel every year, and savings from cheaper fuel are
helping them post record profits. Thanks to cheaper fuel, travellers are seeing
a slight drop in average airfares after five straight years of fares rising
faster than inflation.
PRODUCERS FEEL THE PAIN
Oil companies, their employees, and their subcontractors are
feeling the pinch from lower prices. Profits are down at the majors such as
Exxon Mobil Corp. and Chevron Corp., but independents are suffering more.
“Exxon is not going to go out of business even if oil goes
down to $10,” said Fadel Gheit, an energy analyst for Oppenheimer. But many
smaller independents will be forced to consolidate because they can’t handle
the higher costs of acquiring acreage, expensive drilling technology and
declining fields in the U.S., he said. “It can’t get any bleaker.”
According to government figures released Friday, the energy
and mining sector, that’s mostly oil and gas exploration and production, has
lost 122,300 jobs in the last year. Paychecks for those still employed are
smaller: Average wages in the energy industry have fallen 1.5 per cent at a
time when other workers are earning slightly more than they did a year ago.
On Monday, the NYSE ARCA Oil and Gas index dropped nearly 4
per cent. Exxon and Chevron fell more than 2 per cent, while smaller oil
companies incurred steeper losses.
GOVERNMENTS FEEL PINCH
Several energy-producing states, such as Alaska, mapped out
budgets based on oil at $50 to $60. Their plans are crumbling now that crude
prices are around $40. Natural gas prices also are down sharply and the future
for coal looks bleak. In North Dakota, overall revenues are 7.5 per cent lower
than were expected for the two-year budget cycle that began July 1.
Overseas, collapsing oil prices have undercut exports and
the economy in Venezuela, leading to shortages of goods and contributing to the
ruling socialist party’s defeat in legislative elections Sunday. In Russia, the
government budgeted its spending on $50 crude. Its oil-dependent economy is
expected to shrink 3.4 per cent this year, according to the International
Monetary Fund. On Monday, the ruble fell 1.3 per cent against the dollar to a
three-month low.
