Oil Price Gusher – July 12, 2021

If you have been paying attention to the price of gasoline, you know the cost at the pump has jumped. According to GasBuddy, the average U.S. price for a gallon of regular gasoline topped $3.15 on July 8, the highest since late 2014. 

The primary reason for the big rise in gas prices: higher oil prices, as illustrated in Figure 1.

Note in Figure 1 that the price of oil tends to run in a long-term trend. Prices were stable during most of the 1980s—1990s before galloping higher in the 2000s. Since the most recent peak in 2014, prices have held well below $100 per barrel.

A surge in U.S. oil production during the 2010s led to an oversupply of oil on the world market, which dragged the price down.

But why are oil prices rising today? Although the U.S. remains the world’s number one oil producer, according to the U.S. Energy Information Administration, U.S. production (black line) is well off its 13 million barrel/day pre-Covid peak—Figure 2.

Meanwhile, U.S. oil rig activity (red line) remains depressed, as drillers choose to plow cash into debt repayment and dividends rather than into drilling. The last time oil was in the $70s, rig activity at home was more than double what it is today.

Additionally, OPEC+ (OPEC + Russia) has done a good job limiting production, while the global economic recovery and the summer driving season in the U.S. have boosted oil demand.

Last week’s failed OPEC talks to raise output could further restrict supply. Or, and here’s where it gets tricky, the failure to boost output quotas could spark new production and a price war if countries were to fight for market share.

Elsewhere, uncertainty regarding the Covid Delta variant could hamper the global economic recovery and slow the growth in the demand for petroleum.

Ultimately, the cure for high prices is high prices. Fracking and horizontal drilling can be very responsive to prices. Supply can quickly come online if oil companies aggressively seek new supplies, which may ultimately happen.

But on the other side of the world, OPEC+ is trying to do what it can to nudge up the price of oil without igniting a surge in U.S. production, which would steal market share from the cartel and put a lid on prices.

Created 2021-07-12 22:11:56