The current state of oil prices is raising eyebrows, with rates holding steady above $106 per barrel. This leads us to question: Wasn’t the rise of oil fracking supposed to boost production and lower prices?
To some extent, the anticipated increase in production has materialized. According to the Energy Information Administration (EIA), U.S. oil production for the week ending July 5 reached 7.4 million barrels per day—an 18.4 percent increase from just a year ago. This marks the highest level of domestic oil production in over two decades.
Despite the persistently high prices, the combination of increased domestic output and enhanced energy efficiency is proving beneficial for the nation…
As noted by The Daily Beast, “The rise in U.S. oil production is reducing the reliance on foreign oil from OPEC countries, as domestic fuel demands are lessening.”
“In addition, the U.S. is becoming increasingly efficient in its oil consumption—thanks to advancements in vehicle efficiency, decreased driving habits, the use of natural gas as a transport fuel, and significant investments in renewable energy. The EIA reports a 2.1 percent decrease in total liquid fuel consumption in 2012, with an anticipated rise of less than 1 percent in 2013.
“This suggests a reduced need for oil imports, particularly from OPEC nations.”
Clearly, the progress toward greater energy independence for the U.S. is a remarkable advantage. However, the pressing question remains: when will oil prices decline?
Other Factors at Play
While production is on the rise and demand is waning, one would expect prices to drop: this, however, is not the case due to additional influencing factors.
According to Bloomberg, dwindling oil inventories and speculation are driving prices higher.
“West Texas Intermediate crude has risen amidst speculation that U.S. inventories will continue to decline after experiencing the largest two-week drop in three decades.
“Futures saw a 1 percent increase today and a 2.6 percent rise over the week. According to the EIA, inventories fell by 20.2 million barrels, landing at 373.9 million for the period ending July 5. WTI has transitioned into backwardation, where futures approaching expiration are priced higher than those further out, removing the incentive to stockpile supplies. Additionally, WTI prices rose due to corporate earnings exceeding market expectations.”
Regrettably, this pattern of shrinking stockpiles and strong seasonal demand is predicted to continue for the foreseeable future.
Your Summer Tax Increase
“The fundamentals appear highly positive,” stated John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund specializing in energy. “The inventory drop was substantial, and we are seeing notable demand. The report next week should indicate another decline in supplies.”
However, elevated oil prices present a challenge for the economy. Prolonged high prices can stifle economic growth, and they invariably contribute to increasing consumer price inflation.
For example, gas prices are on the uptick. According to AAA’s Daily Fuel Gauge Report, the national average price for regular gasoline rose from $3.47 to $3.60 per gallon this past Sunday, reflecting a 6.2 percent increase over the past year.
Moreover, the rise in gas prices also contributed to wholesale inflation, which saw its largest increase in nine months in June—up by 0.8 percent, according to the Labor Department.
Although gas prices began to surge in July, if this trend continues, we could see significant inflationary impacts this month. Notably, these rising gas prices signal more than mere inflation; they typically lead to a slowdown in economic growth.
You see, increased gas prices function similarly to a tax hike on household budgets. While most families cannot significantly reduce their gas consumption, they will likely cut back on other expenditures.
The ultimate outcome is a decline in overall consumer spending, which in turn hampers economic growth. We anticipate tomorrow’s headlines may echo this sentiment.
Sincerely,
MN Gordon
for Economic Prism
