Archive for October 24th, 2014

Who Doesn’t Like Lower Fuel Prices Anyway?

Friday, October 24th, 2014

Today (10-14-2014) the financial headlines read: “The price of crude oil is down 25% since its peak last June”. In addition, the price of crude oil today is equal to the level found way back in June of 2012! Some industry observers predict that soon the price will reach levels not seen in over 4 years. As crude oil prices decline, so does the price of gasoline and diesel at the local gas station. In much of Texas, for example, the price at the pump for regular unleaded gasoline is below $3.00 per gallon. That’s great news! It seems that just about everybody is happy when the price of gasoline comes down at the pump. Any private consumer of gasoline likes to see the price of filling the family car come down. Any commercial business operator loves to see their fuel expense come down, and bolster the bottom line. Several other industries from Airlines to Cruise Ships to Retailers who receive products by transportation companies, must love to see the fuel price decline. As an owner of a Non-Emergency Medical Transportation company, I am especially grateful for the recent decline in fuel prices. For our company, next to payroll costs, fuel costs are our single greatest expense. I am thrilled to hear that industry experts predict that this downward trend will continue well into next year…possibly much longer.

To what do we owe this dramatic decrease in fuel prices? We can begin our analysis with the basic economic concepts of Supply and Demand:

Supply: We can thank the expanding US oil production for contributing to the increase on the supply side. Oil production has been increasing in the U.S. for over 4 years now, primarily driven by expanding production from the Bakken Shale Formation in North Dakota and the Eagle Ford Shale in Texas. Newly developing technologies in oil drilling and oil extraction technologies have made it possible to produce massive amounts of domestic oil from areas that were previously thought to be non-producing. True, there are those who criticize the potential ecological dangers associated with uncontrolled and unchecked drilling for oil, but there is no denying that the recent US oil boom has greatly improved our US economy and stimulated job growth, and not to mention, relieved our dependence on foreign supply.

Demand: The demand for oil based fuels in the US has actually declined 7 out of the past 8 years. Partly the result of automobile engine efficiencies and the introduction of alternate fuels and alternate energy sources. Globally, the European market is soft due to a weak economy and decrease in demand. Asia, and specifically China, exhibit a growing demand for oil, but that demand is growing less rapidly than in past years.

In addition to the abundant supply of oil, there is a strategic geopolitical aspect which also promotes lower fuel prices. OPEC, and Saudi Arabia in particular have announced that they do not intend to cut production of oil as a means to support prices. They have made it clear that they intend to “maintain market share” and have already participated in price cutting. This position increases world oil supplies, amid declining demand.

Now we know fuel prices are declining, and why. We know that just about everybody benefits from this situation. What I find fascinating is that there are some people who may not like lower fuel prices.

Some energy experts have speculated that if the world powers of United States, OPEC countries, Europe and Asia, allow oil prices to decline, this strategy would weaken the terrorist organization known as ISIS and their war machine. It is well documented that ISIS is funded in a large part by its participation in world oil trading. (in addition to extortion, weapons trading, money laundering and kidnapping). With less revenue coming in to ISIS from depressed world oil prices, that leaves less money to buy guns and recruit followers.

We can conclude that ISIS does not like to see lower fuel prices.

Petroleum products represent 67% of Russia’s total exports. Lower energy costs will magnify the economic impact of US and European sanctions imposed on Moscow that resulted from Russia’s power grab in the Ukraine. Russia’s credit rating is in decline, and the value of the Ruble in the world exchange market is also lower.

We can conclude that Vladimir Putin does not like to see lower fuel prices.

Those who are CEO’s of multinational oil companies may not be thrilled about lower energy prices either. Exxon, Shell, BP and companies like them have seen their stock prices take a hit lately on Wall Street. It’s hard to feel bad about companies with such huge profit reserves. I’m confident that they will get by.

We can conclude that Major Oil Companies do not like to see lower fuel prices.

When all is said and done, those of us who benefit from lower fuel prices, have a lot more to be happy about. And those who don’t benefit from lower fuel prices…Well too bad.