Fill ‘er Up – April 22, 2019
Have you pulled into the gas station lately? If so, you’ve probably noticed the cost of filling up the gas tank has risen since January. The price of a gallon of regular gasoline averaged $2.84 in the U.S. as of April 18, according to GasBuddy. It’s up over 60 cents from the early January low.
As the graphic illustrates, prices fell dramatically late last year, and the recovery has been just as dramatic.
What’s happening? First, there is a seasonal component to gasoline. Prices rise in the spring, peak in early summer, and decline after Labor Day.
The first four months of 2019 have not diverged from the seasonal trend, with prices outpacing the 19-year average. If it’s any consolation, the price of oil is up 40% this year (EIA data), below the increase in gasoline.
Oil is the biggest component in the gas price equation. So, why is oil up so much?
1. In response to last year’s collapse in oil prices, OPEC announced production cuts scheduled from January – June. According to Bloomberg, OPEC’s biggest producer, Saudi Arabia, has exceeded its commitment in reducing oil output, helping to reduce last year’s oversupply.
2. Falling output from Venezuela, Libya, and sanctions on Iranian oil have also limited supply.
3. Economic growth at home and China appears to be stabilizing, which could aid demand for oil. The recovery in the stock market may also be encouraging a flight into riskier commodities such as oil.
4. Baker Hughes oil rig count is down since late last year, which has slowed the boom in U.S oil production.
Headwinds to higher oil prices
OPEC can either fight for market share or prop up prices. It can’t do both.
1. Russia, a non-OPEC member that agreed to output limits, has hinted it may not extend production cuts; Russia may be growing weary of ceding market share to U.S. producers (Reuters).
2. U.S. shale is the relief valve. Shale firms have talked about profitability rather than producing at all costs, but when might higher prices encourage another spurt in production, as occurred last year? Unlike traditional oil plays, shale producers can quickly respond to higher prices.
3. New pipelines will open this year, that could add new supply to the global market (WSJ).
The U.S. no longer imports huge quantities of oil as it did in prior decades. During the 2000s, net oil imports surpassed 13 million barrels/day per the EIA. In the week ended April 12, net imports slipped below 1 million barrels. That’s a seismic shift.
Therefore, falling prices don’t aid growth as much as in the past. While there is more pain at the pump, rising prices are no longer as detrimental.
Benefits to higher oil prices
The U.S. is the world’s largest oil producer behind Russia and Saudi Arabia per the EIA. Rising prices encourage investment and create energy-related jobs. Higher prices also aid profits in the energy sector, which lends support to overall earnings.
Drawbacks
Higher prices lift inflation and reduce disposable income that could boost spending in other areas.
Created 2019-04-22 14:29:06