Crude oil prices continue to slide on weakening economic news. Coupled with increasing domestic production, Key benchmarks are all at, or near, a four year low. West Texas Intermediate ("WTI") is expected to finish the week under $82.00, well below the $100 to $120 range reached between 2010 and 2012.
In fact, the drops have been startling, with WTI closing down $3.90, or 4.77% Wednesday alone, and other key benchmarks have not fared better. Until recently, Brent Crude Oil has traded significantly higher than WTI. Surging production and better transportation options have significantly whittled away at the typical $10 to $20 per barrel spread over the last several years. On Wednesday for example, Brent closed down $3.85 or 4.53% to $85.04.
While price drops are not unusual during periods of weak demand; this time however, it presents an interesting turn from decades of dependency on the shifting political winds of the Middle East.
Historical pricing has been affected by, and dependent upon, turmoil in the Middle East. In times of war and geopolitical instability, prices have historically increased rather quickly, often overnight. As turmoil eased, so too would oil and gas prices, albeit at a much slower pace.
Based on historical data, one would expect prices to be dramatically spiking given current events in Syria, Iraq and Libya, yet for all of this instability, prices continue to drop. This, in turn, directly translates into lower gasoline costs for drivers at the pump, with many drivers experiencing unleaded gasoline below $3.00 a gallon.
The drop in price may appear to some as an indication of a weakening market due to conservation, renewables, and weaker economic data. While partially true, the decline also validates the strength of the domestic energy market. While the U.S. is still dependent upon imports, surging U.S. production means the country imports far less than it has in years.
According to the U.S. Energy Information Agency, in 2013 the U.S. imported approximately 33% of the petroleum consumed, the lowest since 1985. Stated another way, net crude oil imports are down over 25% in the last five years while the country is still more than 20% below its peak production of 1970.
Not only has the amount of oil imported changed significantly, where the oil comes from, has changed significantly as well. Perhaps just as important is where the imported oil comes from now. At a little over 3 million barrels per day, Canada has replaced Saudi Arabia as the largest U.S. importer. Once thought unimaginable, the Organization of the Petroleum Exporting Countries known as OPEC has seen its influence and clout vanish practically overnight.
For many countries, the low price of oil directly translates into economic woes, including the possibility of a contracting economy. According to a recent article in Bloomberg Businessweek, if pricing remains under $104 a barrel, Russia will face a drop in its gross domestic product by up to 1.5 percent. Coupled with biting Western sanctions from Mr. Putin’s Ukrainian folly, the temperature may not be the only numbers falling in Russia this winter.
Other countries such as Iran and Saudi Arabia will also feel the pinch as the budgetary break-even point for each country is $115 and $93 a barrel respectively.
For U.S. producers, expensive production costs may force smaller companies to the sidelines. If the price falls too low, areas dependent upon fracking technology may find it harder to find a profit, especially if oil were to drop into the $60.00 to $75.00 range. Experts believe however that a continued slide is unlikely and hints of a rebound were present as early as Thursday after an initial decline.
While significantly lower prices seem unlikely for the moment, one thing is for certain; the U.S. energy market remains strong, despite cheaper prices at the pump, and for now at least, that’s good news for everyone.
Mr. McCown is a former government executive, attorney & public policy expert, retired U.S. Naval Aviator, and an avid baseball fan who calls it as he sees it, right down the middle. To learn more, visit him at brighammccown.com
