By on December 1, 2014

Is your wallet feeling heavier these days, despite all of the blackened Thanksgivings and cybernetic Mondays meant to liberate you from your money? It’s about to become more so, thanks to an early Christmas present from OPEC.

CNBC reports OPEC decided in its meeting last week not to cut back oil production, preferring to defend its piece of the petroleum pie from shale drillers in the United States, whose efforts added 1 million barrels/day to the nation’s oil production in less than a year.

In turn, prices for West Texas Intermediate fell to $66.15/barrel, while fuel prices averaged $2.79/gallon over Thanksgiving, the lowest average since the same time in 2009. The price is expected to fall further, per Lipow Oil Associates president Andrew Lipow, who expects the average to hit between $2.55 and $2.60 per gallon nationwide by Christmas.

However, if OPEC hoped to thwart U.S. production — currently at 9 million barrels per day, a rate not seen since 1986 — the organization may be in for a shock. Lipow explains:

I expect oil production is going to continue to increase in the U.S. over the next three to four months as shale oil and Gulf of Mexico projects that are underway get completed.

Meanwhile, production at existing wells would be cut back as exploration and production companies look to refocus their budgets toward the most productive sites.

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28 Comments on “Fuel Prices To Hit $2.55 By Christmas With Help From OPEC...”


  • avatar
    319583076

    Yeeeeee-haaaaaaaw! Time to trade in my penalty box for a 3-ton SUV with the biggest engine they make! *taps heels*

  • avatar
    Noble713

    They expect production to grow over the next 3-4 months? That’s nice. Too bad OPEC is probably playing a longer game, sitting on enough cash to sell at these low prices for ~2 years….more than long enough to make US shale cost-prohibitive.

    To say nothing of how shale/fracking fields suffer massive declines in productivity after the first 1-3 years. Bottom line is don’t get too excited over cheap pump prices, it probably won’t last.

    • 0 avatar
      ect

      According to Morgan Stanley, production cost in the Middle East averages around $27/bbl, compared to $65 for North American shale oil.

      At a market price in the range of $60-70/bbl, the Saudis and their neighbours are still making money. Not as much as if prices were higher, of course, but still quite profitable. Shale and oilsands, though, become unprofitable.

      The same report indicates that other OPEC members and Russia have production costs in the range of $50/bbl, so pricing in the $60’s gets painful.

    • 0 avatar
      jimbob457

      Get your mind around the term ‘fracking’ and all that it implies. Fracking collapsed natural gas prices in the US after less than five years. Check the history of spot natural gas prices at Henry Hub.

      Fracking works for oil too. It spread to two obscure and mined out oil provinces in the US: the Williston Basin and the Permian Basin. In three years this became instrumental in breaking world oil prices.

      All this means much lower oil prices for a long time. Just how low and how long remains to be seen, but it ain’t gonna be $100 any more, and it sure as Hell figures to be MUCH longer than two years.

      • 0 avatar
        ect

        Fracking seems to be more expensive than conventional oil. According to Morgan Stanley, the average production cost of fracked oil in the US is around $60 per barrel. That will operate to set a floor at some level above that.

        I don’t pretend to understand the cost structure of the oil industry, but I’m sure there are a lot of smart people with a lot of high-powered computer technology monitoring when to pump and when not to. If prices stray to low, fracking stops being economic and production will cease (and a lot of exploration and development with it).

        According to the same Morgan Stanley study, production cost in the Middle East averages around $23 per barrel. So the Saudis can afford to play strategic games with pricing.

  • avatar
    Occam

    I buy somewhere between 600 – 700 gallons of fuel per year. A difference of $1 in the price of gas would come out to well under 1% of our household budget for the year. It’s something, but not much.

    That said, there are people for whom gasoline is a major expense, and they have to make serious budgetary adjustments when the price spikes. Hopefully they’ve learned from the past spikes and are saving the extra that they would put into the gas tank to prepare for the future, and not blowing it all on iPhones and XBoxes. And maybe peace on earth and good will toward men will flood the globe next year.

    • 0 avatar
      Johnster

      I don’t think that I use even that much fuel in a year, and while it is better than another price increase, it just doesn’t seem like that big of price cut in the overall scheme of things. So many other things have gone up, except for my income.

      I plan on blowing it all on groceries, housing, healthcare, and saving for retirement.

  • avatar
    Hummer

    We’re already at $2.58, and I saw $2.54 west of Greensboro 3 weeks ago, thanks to California unbalancing everything I guess that means we can expect $2.20 or so a gallon in the rest of the country?

    Still extremely expensive for a gallon of fuel, but closer to reasonable I suppose.

    • 0 avatar
      Occam

      California doesn’t seem that much higher right now (looking at GasBuddy). It seems that Texas and most of the south (west of GA, plus Virginia) are lower, everything else is higher. Mostly $2.45-2.55 here in TX ($2.38-$2.45 in the next County, for some reason).

  • avatar
    EAF

    It’s going to be one very merry Christmas! ;-)

  • avatar
    schmitt trigger

    The really important thing here, the lowered oil revenue that will directly impact the income of petro-tyrants.

  • avatar
    thegamper

    I think this should be seen as nothing but bad news for the United States. The article quoted omits some very pertinent facts. For one, Saudi Arabia lowered the price of oil shipments to the United States while at the same time raising them for shipments to Europe. This is a plain and simple price war meant to drive US domestic oil to bankruptcy. There is some debate over what the break even price for shale oil is in the US, I have seen some estimates that go as low as $40/Barrel, but $60/barrel seems a more accepted view. The price as it stands will lower investment in new development and probably limit production growth into 2015. If these actions were taken by Japanese automakers, industry and politicians would go ballistic with accusations of dumping.

    There is currently export restrictions on US produced oil, if you see sustained prices of $60/barrel or lower, expect increasing pressure from industry to lift those restrictions so they can export to higher priced markets. This hurts prices here.

    And then of course there is the fact that extremely low prices put Americans back into more and more trucks and SUVs, curtails development and sales of alternative vehicles and then a few years down the road when the US Shale industry is on its knees, there has been no new development in production capacity in years and output shrinks, we get hit with supply shocks and are stuck in gas guzzlers and right back to $120/barrel or higher prices. Such lack of foresight in the American consumer.

    • 0 avatar
      Occam

      And cue another round of whining when the new Canyonero’s apetite becomes pricy again with the next spike.

      I learned my lesson with a Jeep Wrangler in 2002. The price of gasoline jumped from $1.65 to 2.30 in my area within 5 months, and I was young, newly married, and not making much money. I now go into a car purchase with the assumption that I should be able to pay for gasoline at 2-3 times the current price.

    • 0 avatar
      Hummer

      No lack of foresight, I understand what your saying in the first two paragraphs, but there are no cheap gas hogs that are made by any automaker, if you can afford the entry cost into something without great fuel economy, you can afford the fuel. Don’t blame fuel costs on the lack of acceptance of alternate fuel vehicles.

    • 0 avatar
      Pch101

      “This is a plain and simple price war meant to drive US domestic oil to bankruptcy.”

      Americans need to realize that not everything in the world is about them.

      We’ve seen this play before: cartels tend to weaken over time as the unity of the members of the cartel begins to fail. OPEC went through this same process thirty years ago as the world began to adjust to climbing oil prices by reducing consumption.

      OPEC is at the unique disadvantage of being dominated by countries that are fiscally unsound and overly dependent upon oil for their prosperity. They don’t want to cut supplies because they individually cannot absorb the loss of revenue that would come from reduced production.

      OPEC doesn’t really control pricing and apparently they know it. The only thing that cutting their supplies would do is to deprive them of money that they need to function. The failure of most of them to diversify their economies is an ongoing mistake.

      • 0 avatar
        bunkie

        While OPEC may not control pricing, Saudi Arabia has, for decades, played the role of swing producer.

        I do think that the Saudis are concerned about increasing US and Canadian production. But I also think that they are more concerned about squeezing Iran and Russia. Viewed from that perspective, this has an aspect of the world-wide war between the Shiites and the Sunnis.

        • 0 avatar
          Pch101

          There is no spike in global oil supply. Supplies have been increasing gradually over time, and some of the suppliers have shifted — more of it is coming from the US and Canada, less of it from Venezeula, Europe, and Africa. Oil is mostly a fungible product, so it makes little difference to world markets where it comes from.

          Oil prices are trending downward largely because of concerns for economic slowdowns in Europe and Asia, the downward trend in US consumption and the end of US quantitative easing — traders would be foolish to be bullish given that confluence of factors and they are bidding down accordingly.

          OPEC can’t do a thing to prevent any of that. The futures markets control pricing; OPEC is mostly along for the ride.

          • 0 avatar
            Toad

            Oil prices are also affected by potential and real disruptions in supply. Right now there seems to be very little potential for supply to tighten: the Gulf states need every penny they can get, and US and Canadian production gives the US a substantial cushion. Prices used to spike with very threat to middle east production or transport; now, not so much.

            Fun fact from today’s WSJ: just the increase in daily US oil production in the last few years is more than ALL of the oil produced by OPEC countries (except Saudi Arabia) COMBINED. That is a lot of additional supply.

          • 0 avatar
            Lorenzo

            The futures markets are setting prices from mid-January into February now. It may be a Christmas present, but it’ll keep on giving through New Year’s Day, Martin Luther King Day, and into Pres*dent’s Day. If something changes, we won’t see the effect until St. Patrick’s Day or Easter. It’ll probably be June when we see how the Saudi gambit shakes out. I’m guessing it’ll take a full year to put a crimp in fracking.

  • avatar

    I drove by a gasoline station last night and E10 gasoline was $2.30 a gallon.

    Yeah.

    Unfortunately, I paid $3.59 a gallon for diesel yesterday, and—thanks to a road trip—I’m due for a fill-up again.

    • 0 avatar
      Hummer

      Diesel prices make little sense, a mile down the road diesel costs about 3.50, go 4 miles diesel costs $3.19.

      • 0 avatar
        jimbob457

        Long haul truckers are usually pretty savvy about their business. If you knew what they know, maybe the difference in posted prices would make more sense? Or, maybe the guy with the high posted price is just slow to respond in a rapidly changing market?

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