Premium gasoline went over $3 a gallon in April in some parts of the country. As painful as expensive gas can be, experts believe that sending prices up is good for the economy. Even today, gas is 20% cheaper than it was in the 1980s. While every commodity out there has become more expensive, oil has actually become cheaper.
Oil Prices Over the Past Three Years Have Been Artificially Depressed
OPEC nations have been pumping oil far below capacity over the past year to try and shore up cratering prices. This kind of action wasn’t in evidence in 2014 or 2015, however. Pumping at record levels then, Saudi Arabia and other members of the cartel helped keep prices unnaturally low. As they saw revenues crash, they regrouped and production cuts were agreed upon. Now, prices are back up and will likely continue to climb. Brent crude has risen as high as $74 a barrel in April, and the WTI is at $68.
American Drillers Are Cashing In
According to Sigma Drilling Technologies, manufacturer of the innovative suction stabilizers, with prices at levels unseen in years, American drillers are pumping more than 10,000,000 barrels a day. The Commodity Futures Trading Commission has reported that speculators have been placing bullish bets far in excess of bearish ones.
While high oil price levels are profitable for the American industry (and create considerable demand for products such as Sigma’s suction dampeners), many observers are beginning to worry that production at this rate could begin to depress prices in the near future.
OPEC Is Still Behind the Cuts
OPEC members and Russia have been working for years to cut about 2% off the global crude supply, in an effort to support higher prices. They have succeeded, obviously, since prices are now close to $80 a barrel. Yet, U.S. shale producers have upset their plans with their excessive levels of production, cashing in on these prices.
There have been fears among U.S. producers that OPEC and Russia could now respond by scaling back on production cuts. In a conference in Jeddah in late April, however, these member states have actually renewed their commitment to tightly controlled production goals to the end of 2019. Saudi Arabian and Russian ministers of oil have vowed to ensure full compliance. Compliance actually touched 140% in March. Not all of it was intentional, however – unrest in Syria had some effect on oil production in the entire region.
President Trump Isn’t Pleased
While high oil prices may be good for drillers, they result in higher prices at the gas pump and don’t make the average consumer happy. President Trump sent out a tweet on April 20 to express his annoyance at artificially high prices when the decision to team production cuts at a recent meeting were made public. The president’s tweet had an immediate effect – oil prices dropped 50 cents a barrel (but regained later in the day). As annoyed as the president is at expensive oil, however, Washington has limited control over world oil prices. While the president could try to lower prices by selling oil out of the U.S. Strategic Petroleum Reserve or could bring pressure to bear on Saudi Arabia to raise production, neither move is likely to have much effect overall.
For Now, Favorable Forces Are Well-Established
Today, demand is higher than ever, OPEC’s cuts are firmly in place, Venezuela is out of action, sanctions are imminent against Iran, and sanctions against Russian oil are possible too. Prices should remain high for the foreseeable future.
