Chicken Little Dumb Cluck
You may have heard something about OPEC cutting oil production.
The Biden administration railed against the move and chicken littles everywhere took to the streets and airwaves to proclaim that the sky is falling because gas prices will inevitably rise. After all, the panicked proclaim, prices at the pump have already moved higher.
True, gasoline prices have recently moved high. However, there are reasons other than OPEC for that. In addition, there are several forces primed to push them lower.
OPEC Influence More Preception Than Reality
OPEC’s decision to reduce production by 2 million barrels a day is in reality more like a million barrels a day reduction. According to the U. S. Energy Information Administration (EIA), OPEC’s move will lower its production from 29.6 million barrels to 28.6 million barrels a day for the rest of this year and for the first quarter of 2023.
The reason OPEC’s stated cut of 2 million barrels a day is really more like one million is that the cartel is already producing less than its current quota.
In addition, you have to look at what prompted OPEC’s decision. The cartel fears a worldwide recession. If that happens, demand for oil/gasoline will decline pushing prices lower. So, OPEC’s move was a defensive – not aggressive action.
Why Are Gas Prices Higher
To be sure, OPEC’s announced production cut did push prices higher. West Texas Intermediate (WTI) moved toward $90 a barrel on the news. It had been trading around $80 a barrel several weeks ago. This week WTI declined for three days before rallying slightly Thursday. Late Friday it was trading at $85.74.
The reason for the recent rise in gas prices has more to do with interruptions in domestic than foreign production.
Outages at oil refineries in California and Ohio have restricted production in this country and contributed to recent price hikes at the pump. California in particular has suffered because state laws governing gas formulations are more restrictive than other states. As a result, a gallon of gas there currently goes for $6.152 while the national average is $3.903, according to the AAA.
Gas Prices Headed Down
The EIA has forecast gas prices will decline to about $3.80 a gallon for the remainder of this year. However, the agency expects an even greater drop to $3.57 early next year. In addition, the EIA expects diesel prices to hit $4.86 this year and tumble to $4.29 in the first quarter of 2023.
So, why the rosy outlook?
Increased U. S. Production – Decreased Demand
While international oil production is decreasing, domestic production is increasing.
American crude oil production is expected to pick up about 700,000 barrels a day from now into 2023. The EIA forecasts that U. S. oil production will average 11.7 million barrels a day for the rest of the year and rise to 12.4 million next year.
At the same time, demand is expected to drop.
Gasoline consumption in the United States is expected to decline by 40,000 barrels a day this year to an average of 8.8 million barrels a day says the EIA. Further, the agency sees consumption staying at or near that level through next year.
As if fulfilling those expectations, gasoline consumption dropped from 9.47 million barrels per day to 8.28 million barrels a day last week. At the same time, the supply of gasoline increased by two million barrels to 209.5 million, reports the AAA.
Strong Dollar Reduces Oil Prices
Another factor keeping gas prices from approaching previous highs is the strong dollar.
When economists refer to a strong dollar they are talking about how the dollar matches up against foreign currencies. A strong dollar makes U. S. exports more expensive for consumers in other countries. Conversely, it makes imports cheaper for Americans to buy.
Since crude oil is priced in dollars, it means the dollar can buy more oil than if it were stable or weak. In addition, countries that do not use the dollar see oil prices rise faster. That results in decreasing demand.
The Prospect of Global Recession
On top of everything else, recession fears dampen demand for oil. As mentioned previously, that is what prompted OPEC’s production drop.
“Global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades,” according to an International Monetary Fund (IMF) report.
When economic growth slows, people drive less.
“Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023,” according to the IMF report.
A lot of things influence the price of gasoline. We have not mentioned them all here, such as the war in Ukraine and Chinese economic and health policies as well as sanctions against oil-producing Venezuela.
So, the next time chicken little comes by to tell you the sky is falling, tell him to take his head out of the clouds and dig deeper for information.
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Image and article originally from www.savingadvice.com. Read the original article here.