Oil prices, American gasoline prices continue to rise
Since early 2016, gasoline prices have been gradually rising. Though we’re far from the near-$4/gallon prices we paid throughout 2011-2014, the latest report from the U.S. Energy Information Administration (EIA) indicates Americans should brace for higher gasoline prices this summer.
According to the EIA, the average national price of regular gasoline is $2.75/gallon, the highest since July 2015. This is $0.06 higher from the prior week and $0.51 higher than a year ago. For the summer season, defined by the EIA as April-September, a gallon of regular gasoline will be around $2.74, up 11 percent from last summer. For all of 2018, the average price is expected to be $2.64, costing Americans an extra $190 over last year.
From a local standpoint, Iowa has some of the cheapest gasoline in the nation, ranked No. 16 out of our 50 states, with an average cost for a gallon of regular of $2.59, according to the American Automobile Association. Illinois is No. 38 at $2.81. Other nearby states include No. 13 Wisconsin ($2.59) and No. 37 Indiana ($2.80). Missouri has the lowest average price ($2.45) while No. 49 California ($3.56) and No. 50 Hawaii ($3.58) represent the highest in the nation.
Higher gasoline prices are the result of rising crude oil prices. As the cost of crude oil rises, so do its many distillate products – gasoline, heating oil, kerosene and jet fuel, among others.
On Wednesday, West Texas Intermediate (WTI) closed at $68.77/barrel, its highest price since December 2014. WTI is the benchmark grade of crude oil produced in the U.S. and serves as one of the three main pricing barometers of the global petroleum industry, alongside North Sea Brent crude and Dubai crude. WTI has increased 14 percent from the start of 2018 and more than 54 percent from June 2017, when its price was $44.62.
So, what exactly is causing the rise in crude oil and the corresponding increase in gasoline prices?
Yes, recent tensions in Syria and the Middle East – the center of some of the world’s largest oil reserves – have contributed to the price increase. But the main cause is the continuing cutback in oil production from an OPEC-led group of nations, whose objective is to increase the global price of crude oil.
First, some history. In October 2014, the Organization of the Petroleum Exporting Countries (OPEC) embarked on an initiative to increase crude oil production, thereby driving down prices. OPEC is a 14-nation cartel that accounts for 33 percent of the world’s total oil production. The goal was to cripple their competition, primarily the U.S. oil industry, as ultra-low prices made most oil wells unprofitable. The resulting surge in global crude oil inventories sent oil prices plummeting from $100/barrel in 2014 to under $30/barrel in January 2016.
OPEC’s strategy decimated the U.S. oil industry. However, for many OPEC countries, crude oil is a key element of their economy, and the free-falling prices devastated their economic growth and budgets. Consequently, on January 1, 2017, OPEC and 11 other non-OPEC nations led by Russia, agreed to cut production to raise crude oil prices.
The U.S. oil industry has since recovered and is currently in its second year of a historic production boom. Advancements in technologies have allowed U.S. producers to re-open once unprofitable oil wells and to tap into America’s shale oil fields, which contain some of the largest oil deposits in the world. The resurgence has sent U.S. crude oil production to an all-time-high of 10.54 million barrels per day, well above the prior record of 10.04 million barrels per day set in 1970. This year, the U.S. is expected to overtake both Russia and Saudi Arabia as the world’s largest producer of crude oil.
OPEC’s production cuts have helped draw down the vast global surplus of crude oil inventories. Consequently, oil prices have risen. The global demand for crude oil – fed by a strengthening global economy – has also driven prices higher. But the global supply of crude oil, led by the U.S., is expected to grow at a faster pace later this year and should help keep prices in check. Until then, it’s a waiting game. Unfortunately, that wait will have an added cost for American consumers.
Mark M. Grywacheski, Investment Advisor
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Quad Cities Investment Group, LLC is a registered investment advisor with the U.S. Securities Exchange Commission.
