Summer kicks off with low gas prices
Thanks to affordable gasoline prices, Pittsburgh-area drivers were able to take longer Memorial Day trips this year. Richard Sneddon of Mt. Lebanon, for example, drove his daughter, Paige, to a holiday baseball tournament in central Maryland. He said that low local pump prices, $2.93 a gallon for regular self-serve unleaded, 90 cents less than last May, allowed him to offset “nearly half of the $26 in Pennsylvania Turnpike tolls.”
Around 37.3 million other American motorists hit the road over the holiday, traveling 50 miles or more.
Memorial Day marks the start of the summer driving season, when fuel costs are on the rise. The $2.93 gas cost was only an eight-cent boost over the previous month, and is in fact the lowest price since 2010. The U.S. Department of Energy found that declining prices in the fall of 2014 and winter of 2015 had saved the average household $650.
Things changed in the spring, after the second coldest winter in American history. From the beginning of March to the end of May, the cost of America’s benchmark oil – West Texas Intermediate – went from $43 to $60 a barrel. Gasoline is made from crude oil. The low $43 price reflected less demand and greater supply. The U.S economy, as measured by changes in the gross domestic product, declined by one-tenth of one percent in the first quarter of 2015. This reduced the demand for petroleum products.
The rise to $60 does seem to have been partially the result of the declining value of the dollar. During March and April, the greenback fell five percent against a basket of 16 currencies in the Wall Street Journal’s Dollar Index. This means that America’s overseas oil providers raised prices to compensate for being paid in less valuable dollars. Supplies were somewhat constricted by a seasonal reduction in output at oil refineries, which performed maintenance and a changeover to cleaner burning summer blends.
The overall trend, however, was towards more oil coming out of the ground. U.S production in May of 2015 reached more than 9.5 million barrels a day (mb/d), nearly double the level of only six years ago, and much of it of a higher quality than the 10.3 mb/d of mostly sour Saudi crude.
According to the International Energy Agency in Paris, there currently is a two mb/d surplus of production over consumption on the world oil market, putting strong downward pressure on prices. North Sea Brent crude, the international benchmark, now sells for $65 on the International Petroleum Exchange in London.
One American state – North Dakota – now produces more than the U.S. imports from Saudi Arabia. America’s shale oil output is also not good news for OPEC producers with large populations, such as Nigeria. U.S. shale oil is of the sweet, low-sulfur variety, easy to refine into gasoline, and competes directly with Nigeria’s flagship crude, Bonny Light. Nigeria, Africa’s largest producer, has at least for the moment lost its share of the American market. U.S. imports from Nigeria declined from one mb/d in 2010 to less than 60,000 b/d in 2014. The reduced revenue cut its ability to provide social services and combat the Boko Haram Islamic terror group in northeast Nigeria.
Many oil-producing counties experienced dramatic population growth in the 1970s and 1980s, when oil prices were high. Some of the youth from this era turned to terrorism after the 1998 Asian currency crisis, when world oil prices twice fell under $10 a barrel, a so-called double bottom, leaving their parents unable to provide for their families.
This important demographic and geopolitical fact may be one reason why Iran will make concessions on its nuclear program. News reports suggest a deal could emerge in July, with the lifting of sanctions and the subsequent addition of one mb/d of Iranian oil to global supplies. This could further reduce prices.