by Owen Stuart
August 13, 2018
Gas prices across the US have risen, and consumers are feeling the pain. Prices averaged $2.93 per gallon in the US during the month of July, and relief is definitely not in sight. Unfortunately, a confluence of geopolitical events and consumer habits have made petrol pumping prices pretty pear-shaped. Prices are projected to increase as political turmoil in major oil-producing nations (such as Venezuela and Iran) reduce supply internationally. In addition, historically high rates of compliance to recent agreements among OPEC (The Organization of the Petroleum Exporting Countries) member countries to reduce production is expected to boost prices. However, the US' increasing production of tight oil (oil produced from shale) and accompanying natural gas plant liquids may moderate further price appreciation.
Venezuela is in the midst of international turmoil; as the economy collapses, the country is having difficulty meeting its international commitments to provide crude oil. This inability to meet crude oil demand is partially caused by aging infrastructure. Furthermore, ConocoPhillips recently seized some Caribbean assets of PDVSA, the national Venezuelan oil company. The loss of these refinery and storage assets, along with the deteriorating political and economic situation, has led to a steep drop in crude production in the country. In turn, the production cut is stressing international demand, increasing prices.
Additional uncertainty surrounds the Joint Comprehensive Plan of Action (JCPOA, also known as the “Iran nuclear deal”) and the US’ withdrawal. The US government re-imposed sanctions on the Iranian regime in August 2018 in a bid to force Iran back to the negotiating table. The sanctions may have a chilling effect on Iranian oil exports, especially as the US has prepared additional sanctions for companies that purchase crude oil from Iran. This may cut into Iranian oil production, reducing supply internationally.
OPEC, a global organization of countries that are net exporters of oil, have historically attempted to reach agreements limiting crude oil production to ensure that crude prices remain high. However, countries are incentivized to not follow agreements, as any country producing and selling additional crude oil during a supply constraint will significantly increase profits if other countries cut their production. As a result, many agreements fail to cut production to the point that prices are greatly impacted.
However, in the beginning of 2018, as Venezuelan oil production plummeted, oil-exporting countries successfully maintained oil production cuts. These cuts led to reduced oil supply, just as US demand began a seasonal rise. US consumers use more gasoline in the summertime as they plan trips and vacations via motor vehicles, exacerbating demand.
Luckily, there are some signs of relief from the upward trend in oil prices. As prices rise, the profitability of unconventional oil exploration increases as well. Elevated oil prices for extended periods of time can make drilling in the US’ oil shales much more lucrative. But as output climbs, those higher production levels gradually bring down prices. The US is in the middle of a drilling boom caused by technological developments in the fracking industry and is expected to become an oil exporter by 2022. While conventional oil is less expensive to pump than fracked oil, relatively high crude oil prices will ensure a return to profitability for oil shale drillers. This would have a subsequent moderating effect on oil prices.
Don’t worry, we have you covered! For additional information and analysis of US industry trends, see Crude Petroleum: United States, a report published by the Freedonia Focus Reports division of The Freedonia Group. This report forecasts to 2022 US crude petroleum demand and production in barrels (where 1 barrel is equivalent to 42 US gallons). Total demand is segmented by type in terms of:
Total production is segmented by type in terms of:
US refined petroleum production by type is also included in terms of:
To illustrate historical trends, total demand, total production, the various production segments, and trade are provided in annual series from 2007 to 2017.
While you’re there, check out some of our related reports, which include:
Owen Stuart is a Market Research Analyst with Freedonia Focus Reports. He conducts research and writes a variety of Focus Reports, and his experience as an analyst covers multiple industries.
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