Gas Prices Down, US Oil Future Up

Thomas Quigley ’16

If you drive a car or even pass a gas station on the way to school or work, you’ve probably noticed the steady decline in gas prices over the past few months. As the average price of a gallon of gas has now dropped below $3.00 as of November 2, 2014, this huge decrease has pushed gas prices to their lowest point since 2010. Now, the United States was thoroughly imbedded in the recession at that time, so how is the nation falling back to that point even with a much stronger economy? Essentially, it all boils down to the fact that US production is skyrocketing over the past two to three years and global demand is down as most foreign markets struggle to return from the recession.

First of all, the true reason for such an inflated price of oil several months ago lies in the projected uncertainty of multiple Middle Eastern nations. The fallout of the Arab Spring is still unfolding and many nations appeared to be on the edge of undergoing massive changes, so the fear of a possible decrease in production in those nations caused a rise in prices. However, these projections proved to be only precautionary and artificial, as Middle Eastern oil production stayed level. Now that the fear of a war in the main oil-producing nations has quelled, the price must now fall since it was truly artificially raised in the first place.

Despite the American economy successfully rising out of economic recession, most of the world simply has not been so fortunate. Some of the world’s largest and seemingly strongest economies – China, Europe, Japan, etc. – have all struggled to completely make their way out of their economic woes. Thus, the global oil market faces a huge problem. Demand is down and production is undergoing a meteoric rise because of the US shale oil boom.

Furthermore, the cost of energy in Europe is about 2.5 times that of the US. And the cost of energy in Asia is roughly 4 times greater than the cost in the United States. While China has been successful in the past due to extremely low labor costs, an elevated price of energy cuts Chinese economic gains. Europe, while still in the picture because of its massive influence on global consumerism, possesses neither cheap labor nor cheap energy prices. Therefore, the United States holds a large advantage over these competitors because of its very low energy costs.

While Saudi Arabia produces the most barrels of oil globally, the United States now competes and holds strong among the Middle East in terms of production. Because US production is so much greater now than it was just three years ago, it now imports roughly 40% less oil per year. Now, instead of importing Saudi oil, the United States controls most of the North American market because the Middle East simply cannot compete with lesser cost of transportation for the US. The only evidence needed to support such a claim lies in the fact that the Middle East has lowered its price of oil per barrel from $120 to less than $85 just to try to compete with US oil prices. The global leaders outside of North America are trying to stay competitive and relevant, and as of the past six months, they are failing.

So, while the price of oil is down for various reasons, including the obvious seasonal decrease in the wintertime, it only fuels the American economy as it grows stronger every day. Combine the seasonality with a competitive advantage for the United States over foreign markets and an American oil boom, and we find ourselves coming to the same conclusion. The US is dominating oil right now and our economy is reaping the benefits. With cheaper gas prices, Americans save at the pump, allowing for a great influx of money into our economy by consumers. Clearly, the lower gas prices are something to notice because they will pad your wallet and they will keep America on the rise versus foreign competitors.