Low Oil Prices to Continue Through 2016

Gas prices are pretty low these days. And according to a recent assessment by a professor at the Missouri University of Science and Technology, they are likely to stay that way.

A week ago, the average price for a gallon of regular gas was $2.214, down from last year’s mark at that time of $2.365 and 2014’s mark of $3.406. The drop in gas prices has been steep over past years. In fact, compared to September 2008, a gallon of gas today is more than $1.50 cheaper. That means more disposable income in the hands of American consumers and lower overhead for businesses that use fuel.

The reasons for this drop – and likely continued low prices – are multiple. Dr. Joseph Smith, the Wayne and Gayle Laufer Chair of Energy and Director of the Energy Research and Development Center at Missouri S&T, outlines the three main reasons for low gas prices.

The first reason is hydraulic fracturing, or fracking, which has created abundant oil supplies. Even with oil prices varying between $30 and $50 a barrel, or about half of what they once were, the domestic fracking industry has continued to thrive. The lower profit margin for oil has not significantly restrained the appetite for fracking. New technologies, too, have made fracking easier and more productive.

“The fracking industry has remade itself,” Dr. Smith says. “It’s more efficient.”

Smith’s second reason is that “the Saudis are flooding the market.” Understanding that the U.S. momentum in oil production could eat into their market share, Saudi Arabia and OPEC have attempted to suppress production by offering a cheap alternative.

“It was also clear while traveling in these countries that their political stability was closely tied to the oil markets,” Smith says. “The Saudi’s ability to produce oil at a fraction of the cost compared to the cost to produce oil in the U.S. allows them the ability to control market supply, which helps provide political stability to their country.”

Third, demand for oil is not what it used to be. Automobiles are more efficient. Construction is developing nations such as China and India have leveled off, reducing demand. Once thought to drive oil demand to unprecedented new heights, the stagnation in growth worldwide, especially in China and India, has meant lower demand for oil than once thought.

“What has happened since 2011?” Smith says. “We have not seen the significant economic growth in these countries that was expected, which means their demand for energy has not grown at the same rate as was expected. This means the demand for oil has not risen at the rate that was expected.”

Smith’s assessment is that oil prices will hover around $50 a barrel for the remainder of 2016. That is welcome news for the consuming public, which benefits greatly from lower prices at the pump.