As you may have noticed, filling up your car has felt a lot better lately. Despite increasing tensions in the Middle East, the nationwide average for a gallon of gas stands below $3 for the first time in four years — a roughly 20% drop from June levels. Surprisingly OPEC, an oil producing group that controls about 40% of the world supply, is just fine with this. So, why would a cartel that aims to defend $100 a barrel oil and depends on high prices for the success of its economies, allow oil to slip into the $80s? Simple, America's energy alternatives are becoming far too good. In fact, U.S. drilling companies have become so adept at fracking that the U.S. is expected to become energy independent by 2020. The biggest problem with fracking is its high cost; oil prices need to stay above $85 a barrel in order for new fracking investment to be worthwhile. With this in mind, should OPEC maintain current production levels, we should assume it is more interested in its long-term survival than in a current influx of cash. So, as much as lower oil prices are good for consumers as we head into the winter months, it's critical we maintain investment in all forms of alternative energy, including renewables, here at home. If we hope to continue $3 a gallon at the gas pumps for years to come, allowing OPEC to regain control of the energy markets is not an option.
Do you believe that OPEC will continue to allow oil prices to remain in the $80s? How believable is the prediction that the U.S. will be energy independent by 2020? What is the economic impact of all of this?
Here's the article http://www.usatoday.com/story/money/markets/2014/11/02/opec-oil-stocks-energy-gas-middle-east/18247191/
The OPEC is most likely maintaining similar amounts of revenue despite the falling prices of oil. More people can afford to fill their cars up with gas because of the falling prices. When people see gas dip below 3 dollars a gallon, what is the one thing you always hear? You hear everybody discussing how they are going to fill their tank up all the way instead of only putting in half a tank. It is possible that they are actually making more revenue off of psychological pricing. I expect them to milk this pricing for a while until they notice the independence of the United States' energy in the next five years. There is too much competition for energy at the moment. If the prices for an oil barrel didn't fall into the 80s, they would not b able to maintain a long-term business. It is obvious that fracking offers numerous benefits including prevention of supply shortages from the OPEC.
ReplyDeleteWhile it's currently nice for our wallets, and perhaps there may be some increased consumption due to psychological pricing, this is clearly a swift power play from OPEC. America's oil production capabilities are rapidly increasing, and that is a direct threat to OPEC's member countries. As the article states, by OPEC keeping a higher supply on the market to decrease the price to $80/ barrel, a lot of investment (in the macroeconomic sense) will flee the market. This will directly hurt private producers as they have the highest startup costs. The U.S. has a fair amount of investment in domestic oil production, and if investment falls so will GDP and this adversely affect our economy. To what extent is the pressing issue.
ReplyDeleteI think T.J. makes an interesting point with his psychological pricing theory. I'm not sure if that is what is going on or if our increase in fracking has caused a lower price for oil. Regardless, I am encouraged by the prediction that we will be energy independent by 2020. I think we could pull it off. My only worry is the environmental implications from all the fracking.
ReplyDeleteI think the article gives OPEC entirely too much credit. They haven't been able to credibly enforce a cartel strategy for decades. Members regularly cheat and overproduce, oil production fluctuates wildly due to civil wars, and alternatives (like fracking) are now well developed. Greed beat OPEC more soundly than any national strategy for energy independence ever could.
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