How Oil Producers are Dealing with the Lowest Gas Prices in 4 Years


Oil Producers Deal with Falling Gas Prices

The United States has recently shown a great increase in oil production. Though the export of U.S. oil has sparked some debate, this has led to a U.S. consumer benefit, with gas prices at their lowest in 4 years. U.S. crude oil production has reached its highest point in over 3 decades, with output at its highest since at least January 1983, according to the earliest recorded information available from the Energy Information Administration.

More than one might think, the decreasing price in gasoline for American consumers, paired with a large increase in domestic production of crude oil, has already begun to affect entire countries’ governments and power – both positively and negatively. Oil production impacts more than just a consumer price for gasoline at the pump; the ability for the U.S. to produce crude oil in high quantities not only lowers domestic prices, but also impacts the need for foreign imports of oil and its price.

The Vice President of Global Analysis at an advisory company in Austin, Texas, Reva Bhalla, states in a recent article published by Bloomberg, that oil is “the most geopolitically important commodity” and “drives economies around the world”.

The low domestic price of gasoline for Americans has historically shown, and is expected to reveal, effects on both foreign and domestic oil production, the geopolitical environment, the oil economy overall, and even foreign relations between oil-producing countries.

History of Oil Prices and Results

The late 1980s saw a rapid decrease in oil prices, which is said by a Bloomberg news article to have “helped pave the way for the breakup of the Soviet Union”. The same article states that the low price of oil at that time could have been a large factor in the Iraqi leader Saddam Hussein’s actions of invading Kuwait in 1990, which arguably started the argument leading to the first Gulf War.

Graph of Crude Oil Prices

Countries Affected by U.S. Oil Production Increasing and Price of Gasoline Decreasing

According to the Bloomberg article, countries looking to suffer from a drop in the price of gasoline, and the surge of U.S. oil production, are predicted to be Russia, Iran, and Venezuela. On the contrary, China is predicted to come out ahead – along with the U.S. – due to lower consumer gasoline prices domestically.

The Guardian reported in a recent article that lower oil prices abroad will greatly affect the British economy, and will devalue oil companies, namely members of Opec, greatly. Opec decided in Vienna that they will “maintain the cartel’s existing [oil] production levels”, even after falling to approximately $70 per barrel.

The Chief Executive Officer of Russia’s largest oil producer, Rosneft, has said that crude oil values could continue to decrease to as low as $60 per barrel. At a price of $60 per barrel, the overall impact would show the price of oil decreasing almost 50% in less than a six-month period. This would greatly impact oil producers and consumers not only in the United Kingdom, but also around the globe.

In Britain, consumers of gasoline are seeing an increase in fuel taxes and the Value-Added Tax (VAT) imposed by the government. There haven’t been notable changes in the increase of motorists increasing their gas consumption in Britain, meaning that oil producers are not only making less money per consumer, but are also losing money due to the fact that consumption overall isn’t increasing at a level of profit. The Bank of England estimates that an increase of just $1 per barrel adds 0.1% to inflation, as far as the Consumer Price Index is concerned, over just a two-year period. This is staggering when multiplied by 30%.

Scotland is a country whose economy is quite dependent on the oil industry. The Scottish Prime Minister states that the North Sea has $24 trillion worth of oil and gas waiting to be extracted, but were approximated at a crude price of $100 per barrel. With a 30% decrease in price, the Scottish National Party’s (SNP) efforts to become an independent nation would be complicated.

The Effect of the Commercial Sector and Decreasing Fuel Prices

The AA reports a trend that a time lag exists between the price of gasoline for consumers, including businesses that rely on gasoline, and these entities using vehicles that utilize gasoline. Oftentimes, the trend shows that pump prices falling doesn’t always cause motorists to get in their car and drive more. However, the commercial sector that utilizes fuel, such as shipping and airline industries, would see a great benefit from decreased fuel costs. The relationship is then formed where lower consumer prices for food and even commodities like steel or items that take a lot of energy to make, are cheaper for the consumer, and they are more inclined to purchase the commodities over purchasing gasoline at the pump.

The Demand of Oil and Energy Prices

Energy prices are falling for multiple reasons – not only due to the fact that U.S. crude oil production has increased. The decrease in the price of oil and petroleum has not shown an increase in demand at the consumer level. The global economy, according to forward predictions, should be showing an increase in economic growth – namely in countries such as Britain, where oil is not as dependent on producing commodities that their economies are based upon. Russia and Venezuela are heavy users of oil to maintain their economy, and are expected to purchase just as much, if not more, oil than the UK due to their heavy reliance on the resource to produce goods that keep their economy strong.

Fracking in the United States

The rate of drilling in the United States–the worldwide leader in hydraulic fracturing–could potentially make the entire industry of oil drilling unattractive for all of Britain, and other nations alike. Unless companies find innovative ways to cut the cost of drilling oil, it would be deemed uneconomic to continue with drilling crude oil. This can and will devastate oil industries outside of the US, should it continue.

The future of crude oil production and its effects worldwide remain to be seen, but a staggering quote made by Daniel Yergin, the vice chairman of a Colorado-based consultant, IHS Inc., and the famed author of a Pulitzer Prize-winning history of oil as a commodity, states the current state of the market well. Yergin was quoted as saying, “For 10 years, the defining factor in the oil market was the growth of China and Chinese oil demand… Now the defining factor is the astonishing growth of U.S. oil production.”

About Tech-Flo

Tech-Flo is headquartered in Conroe, Texas, and is a reputable worldwide provider of hydraulic lift and oil production equipment. With world-renowned equipment, such as multiplex pump packages and hole completion production equipment that began with our successful hydraulic lifting products catering to the oil industry, we pride ourselves in providing the most advanced products. All of our experts in the oil industry have had extensive backgrounds with specific knowledge. We attend to our clients’ diverse needs around the globe.