Latest posts by Marita Noon (see all)
- My Work Here is Finished - November 15, 2016
- America Needs to Use More Energy, Not Less - November 7, 2016
- Haiti Needs Electricity. Hillary Gives Them a Sweatshop, Foundation Gets a New Donor - October 31, 2016
After years of rising gasoline prices, people are puzzled by the recent drop that has the national average for a gallon of gas at $3. I believe the price will tick up in the days ahead (post-election)—which will make it economic for producers to continue to develop—but the increases will not be so dramatic, as to take away the economic stimulus the low prices provide. The low cost equals a tax cut averaging almost $600 for every household in the U.S.As gasoline prices have made headlines, several narratives are repeated. Generally the explanations revolve around two basic truths—but, as we’ll explore, there is more.The reasons offered for the drop in prices at the pump (which reflects the price of a barrel of oil) are 1) increased North American oil production and, 2) sluggish economic growth in Europe and Asia—which together result in a surplus of oil. U.S. oil output now stands at a 28-year high—up 80 percent since 2008. Thanks to the combined technologies of hydraulic fracturing and horizontal drilling, experts predict the U.S. will become the world’s top producer by 2015. CNN Money reports: “The U.S. isn’t addicted to foreign oil anymore. The shale gas boom in the U.S. is a game changer for oil prices.” The U.S. has changed global oil markets, but so has ISIS. Several months ago, when ISIS first emerged as a threat to Iraq’s oil production, oil prices experienced the usual pike. However, when Iraqis and Kurds thwarted its southern movement and it did not take over Basra’s oil fields, prices eased. ISIS has become a real player in the global oil markets. The territory controlled by ISIS has a pre-war capacity of 350,000 barrels per day (bpd). Estimates vary, but it is widely believed that ISIS produces 50-80,000 bpd—most of which it sells on the black market at prices assumed to be $25-60 per barrel. The terror group’s most frequently cited oil revenue figure is $2 million a day. ISIS doesn’t abide by any international agreements or price regulations. This is a “black market.” There are no tangible income or production numbers. We don’t definitively know all of ISIS’ customers.The region’s long-established smuggling routes make it easy for the oil to be trafficked out of the territory where someone buys it.Some of ISIS’ heavily discounted oil reportedly ends up in Pakistan. Legitimate traders won’t deal in it, so it likely goes to nations that care little about the rule of law—perhaps, North Korea and China. The outlets that are soaking up the discounted oil, are not buying the full-price oil, which leaves millions of dollars, 50-80,000 barrels, a day of full-price oil, on the table, looking for a buyer. So, U.S. oil and ISIS oil continue to put a lot of supply into the market, keeping the price low. Unless coalition forces successfully bomb the oil fields in ISIS control, the black market oil supply will grow. If Republicans, who support developing our resources, take control of the U.S. Senate, our production could well increase. Both will help keep supply high, and prices low. The last piece in the low-priced oil puzzle is Saudi Arabia. The Saudi kingdom reportedly needs oil at $83.60 a barrel to balance its national budget. Yet, in September, with prices already down, due to a global oil glut, the Saudis boosted production. Then, in October, it lowered prices by increasing the discount offered to its Asian customers. Saudi Arabia’s government is 85 percent dependent on its oil revenues and, therefore, needs to protect its turf as the dominant force in oil. Most experts agree that keeping prices low hurts higher-cost production such as that from U.S. shale oil and Canadian tar sands, while higher prices encourage more discovery and development. A report from Aljazeerah claims: “OPEC leader Saudi Arabia hopes to claw share from U.S. producers.”Two years ago, Saudi Arabia did much the same thing—increasing production and dropping oil/gasoline prices. At that time, the U.S. faced an important presidential election where one candidate loudly supported America’s new energy abundance and the other’s energy agenda was all about “green.” Had gasoline still been in the range of $4.00 on November 6, 2012, the party in power could have faced harsh consequences. The Saudis came in, and with their unique ability to throttle production up or down, took some heat off of the Obama Administration. In the midst of this election cycle—one that is very important to the future of oil production in America, the Saudis, once again, appear to be orchestrating geopolitical outcomes. OPEC’s oil output is close to a two-year high.It seems clear that OPEC does not want U.S. production to increase, and Saudi Arabia is in a position to try influence American politics. Lower prices favor the party in power. The shift in control of the Senate will mean a change in America’s energy policy—one that favors our homegrown energy resources; one that Saudi Arabia doesn’t want. In spite of possible Saudi meddling, the Senate leadership has shifted. Now that American voters have made that decision, the OPEC leader will no longer have the incentive to inflict short-term pain on its own economic climate for long-term gain. Saudi Arabia will likely dial back production and the intentionally low price will stabilize—but not so much that it hurts the American economy.