Lower Oil Prices Have Unexpected Effects

The United States has become the world’s leading producer of oil. (AP file photo/Jae C. Hong)

HOUSTON (CN) — To stabilize crude oil prices hovering around $50 a barrel after dropping by $20 a barrel since October, OPEC and Russia on Thursday are expected to agree to cut oil production by at least 1 million barrels per day. But experts say that lower oil prices have some counterintuitive effects.

U.S. drivers are gleefully filling up their tanks as gas prices have dipped to a national average of $2.50 per gallon and as low as $1.73 in Texas.

President Donald Trump wants the 15-member Organization of the Petroleum Exporting Countries to keep the spigots open. “Hopefully OPEC will be keeping oil flows as is, not restricted. The World does not want to see, or need, higher oil prices!” he tweeted Wednesday.

OPEC accounts for one-third of the nearly 100 million barrels produced daily worldwide, according to its latest monthly report.

The United States is now the world’s top producer, just ahead of Russia and Saudi Arabia, which pumped out a record 11.3 million barrels per day in November.

Experts say OPEC and Russia need to dial back production by at least 1.3 million barrels a day to get West Texas Intermediate, the U.S. benchmark, back up to $60 from its current $52.58.

“It won’t be an instantaneous move. It will take a little while to work off the inventories that have built up over the last five months,” said Ed Hirs, a University of Houston energy economics professor.

The world is awash in more crude oil than the glut that caused prices to fall from more than $100 in June 2014 to around $30 in January 2016, a spiral that bankrupted 144 companies and took away 250,000 jobs — 80,000 of them in Houston.

Hirs said Trump’s view of low gas prices as a net benefit to the U.S. economy is wrong.

“Lower oil prices dropping as they have from $70 to $50, with the current level of U.S. production at about 11.5 million barrels a day, that’s going to take $80 billion off the top of GDP [gross domestic product],” he said.

Employment will drop, as will income taxes, property taxes and state and local taxes on oil and gas production, Hirs said.

“So one of the challenges is, the president thinks this is like a tax cut for consumers. Well, what’s the consumer going to spend it on? Very rarely does the consumer spend it on more fuel,” Hirs said. “Perhaps the consumer will spend more on consumables, such as food. Or if they’re going to buy goods, maybe they spend it more on imported toys for the holiday season.

“So there’s a significant leakage, if you will, from having the price of fuel drop to having that translate as a stimulus for the overall economy.”

Corporations use 76 percent of the fuel consumed in the United States, Hirs said, and they’re not going to use more simply because the price drops.

The sometimes counterintuitive dynamics are exemplified by Delta Airlines, whose stock price fell by 5.29 percent Tuesday to $56.94 amid investor fears that lower fuel prices would trigger a price war between airlines trying to outdo each other on offering the cheapest flights.

“So the president is, I think, not really aware of the dynamics in the oil and gas market. The one thing he and congressional leaders focus on is we don’t get re-elected if the price at the pump goes up. And so that’s the way they are proceeding,” Hirs said.

Over the past decade, Texas towns built on Eagle Ford Shale — a 400-mile long, 50-mile wide rock formation that runs from College Station in the center of the state, southwest to the Mexico border — have seen the highs and lows of the oil business.

Production in the 20-county region grew from fewer than 60,000 barrels per day in 2008 to 1.72 million in 2015 and brought thousands of jobs to the area.

Driller investment fell with the 2014-2016 downturn, but a rebound in the price of oil that peaked at $76 in October has driven a muted renaissance, especially for pipeline operators, said Paula Seydel, office manager of the Dimmit County Chamber of Commerce in Carrizo Springs. The town of 5,900 residents is 80 miles north of the border city Laredo.

Seydel said RV camps are opening back up as workers return.

“We see more cars in the parking lots of the restaurants and the hotels. That’s an indicator. And also with traffic, we see more traffic on the road,” she said.

She said the locals pay attention to oil prices, but don’t stress about them.

“We get daily lists of what’s happening in the oil and gas industry, but when it moves up and down like that, that’s just the nature of the beast, so I don’t know that it affects us. … I think we just take it as it comes, to tell you the truth,” she said.

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