Cashing in at the Gasoline Pump
Santa came early this year, bringing a welcome boost in personal disposable income and a turbocharger for the U.S. economy. Last June, the world price for crude oil topped out around $114 per barrel, just in time for the usual summer driving season. Then prices began to decline. Then the decline turned into a rout. As you can see from the chart, the world price for crude oil has dropped by just about half since mid year.[i]
Rather reluctantly, gasoline prices at the pump are following crude prices. Where I live, gas is about a dollar a gallon less today than it was last June. For an average Joe who drives 1,000 miles a month at 20 miles per gallon, that is $50 a month, cash money in the pocket. That same average Joe’s paycheck has been stagnant (at best) since the Great Recession began. And nobody explained to Kroger or Safeway that there hasn’t been any inflation. Fifty bucks a month isn’t a fortune, but it will sure help a lot of people. Multiplying that $50 a month by the number of cars on the road results in a figure that even a congressman will notice.
The global supply / demand balance for crude oil reached a tipping point. Prices have been going up – up – up, riding a seller’s market. Now, supply exceeds demand, buyers are in control, and prices are falling like snowflakes in Vail. There are strong reasons for this from both the supply side and the demand side.
>> Fracking – The combination of hydraulic fracturing and horizontal drilling – fracking –has resulted in an enormous increase in crude oil production here in the U.S. As a result, much of the oil that America used to import is now produced at home.
Additionally, fracking has produced a big increase in natural gas production. Low priced natural gas has displaced petroleum products in many heating and steam generation applications, as well as in the production of chemical and plastics feedstocks. To make matters even worse for countries that rely on crude oil exports as a primary driver of their economy, access to fracking technology allows formerly inaccessible crude oil and natural gas deposits to be developed in many parts of the world. Global petroleum reserves and potential for production are going to continue to increase.
>> Negawatts – “Negawatts” is a rather wry term for energy not consumed, thanks to conservation measures. Think higher gas mileage cars and high SEER rated home heating and air conditioning. Arguably, “negawatts” have had a greater effect on America’s crude oil import rate than fracking has. Appreciating Negawatts,[ii] a recent post to this blog, elaborates on “negawatts”.
In any case, crude oil imports have suffered a one – two punch, from the supply side and from the demand side. Just now, global crude oil prices are on the ropes. Of course, as crude prices decrease, high production cost wells will be mothballed and fewer new wells will be drilled. So, prices will recover over the coming months. However, I don’t expect crude oil prices to reach last June’s level any time soon.
For Smaller Manufacturers
About 73% of the petroleum consumed in the U.S. is as fuel for transportation: gasoline, diesel fuel and jet fuel. Much of the remainder is used in industry – think steam generation and process heating. Lower transportation fuel cost means lower shipping costs, in-bound and out-bound. Lower fuel oil cost means lower steam generation or process heating costs – lower, but not as low as natural gas, now and for the foreseeable future. Costs for travel on company business should also improve.
Along with fuel cost savings, there should be indirect benefits. For one, lower energy costs makes U.S. manufacturers more competitive globally. Additionally, since cash that would have gone to crude oil exporters abroad is staying at home, the rate at which money circulates domestically increases, effectively multiplying itself across the economy. Further, as the U.S. balance of trade improves through more export sales and fewer dollars spent on importing crude oil, the U.S. GDP improves. When GDP improves, lots of good things happen.
This current situation regarding petroleum as it affects smaller manufacturers is changing very quickly just now. This post hardly scratches the surface. Look for a considerably more detailed Commentary on petroleum in the coming weeks.
… Chuck Harrington
P.S: Contact me when your organization is serious about pursuing Sustainability … CH
This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.
[ii] See Appreciating Negawatts, this blog: http://jerasustainabledevelopment.com/2014/11/22/appreciating-negawatts/