Gas Prices

Gas prices briefly reach seven-year low; Kansans and Kansas companies benefit

Gas prices in Wichita have hit an seven-year low, with average prices hovering just below $1.60 a gallon, one of the biggest decreases in the nation this past year. Prices are likely to continue to fall for two or three months, according to analysts, as oil prices have hit an 11-year-low.

“Wow,” Will Speer, an analyst at GasBuddy.com, said when he looked at Wichita’s gas prices Monday morning.

The price typically falls in the winter, but usually not by this much. People tend to drive less and use less gas then, so companies lower their prices. But the price has fallen even more than usual because there is so much extra gas coming from local refineries and because world oil producers have pledged to flood the market even further.

And it likely won’t be a steady decrease, as commodity traders try to predict changes in price as new information comes in, Speer said.

Typically, prices begin to rise again in January, but the country has stockpiled 100 million barrels in just the past year, so prices will likely stay low through the end of February, according to Speer.

Crude oil prices are at an 11-year low, while Wichita gas prices are at a seven-year low.

Wichita gas prices have fallen more than 75 cents a gallon in the past year, one of the steepest drops in the nation, according to GasBuddy.com, and is about 50 cents cheaper than the U.S. average. The Midwest tends to see sharper changes in the price of gas than coastal cities, according to Speer. That means that when prices eventually do go back up, in the spring or summer, the price in Wichita will likely go up more than the country as a whole.

In coastal cities, large shipping tankers can move hundreds of thousands of barrels of oil at a time, so when there is too much or too little on the market, prices will adjust quickly to the world price. But in the landlocked Midwest, gas and oil moves more slowly through pipelines and trucks, so it takes longer for the local price to come into line with the world price, according to Speer.

But that doesn’t mean the local oil refineries, which turn crude oil into the gas you buy at the pump, are suffering. According to Speer, refineries in places like El Dorado and Coffeyville have been earning more money recently because, even though the price of gas at the pump has been falling, it hasn’t fallen as rapidly as the price of oil. The refineries make more money when the price of oil, which they buy, falls faster than the price of gas, which they sell.

Crude oil, the raw material from which gas is made, is selling at less than $35 a barrel, its lowest price in more than 10 years. That’s lower than the price of oil seven years ago, when the price of gas at the pump was even lower than it is now, so it’s likely gas prices will continue to fall as the price of gas gets closer to the relative price of oil.

The price of crude oil fell 11 percent last week as the investors who predict how much oil will be worth took into account pledges by Iran to increase production. OPEC, the organization whose member countries say they control 80 percent of global supply, met earlier this month, and Iran made it clear it’s planning to boost exports of crude oil even though prices have fallen.

By keeping the price of oil so low, OPEC countries discourage oil companies in the U.S. and elsewhere from drilling for more oil. But in the long run, this will stop only very expensive new investments such as deep-water drilling, Speer said. That’s because the small fracking wells that have been the source of most of America’s new oil can be taken into and out of production quickly as the prices fall and rise.

(Fracking) is kind of like a mosquito (to OPEC). You can kill so many and the weather gets just right, and then they’ll come back again and you’ll try to stomp them again. It’s going to be the pest for OPEC that will just never really go away.

Will Speer, senior petroleum analyst in the Midwest for GasBuddy.com

“(Fracking) is kind of like a mosquito (to OPEC),” Speer said. “You can kill so many and the weather gets just right, and then they’ll come back again and you’ll try to stomp them again. It’s going to be the pest for OPEC that will just never really go away.”

Many analysts have said that new fracking wells are profitable when the price of oil is between $45 and $65 a barrel. But even when the the price of oil is lower, as it is now, fracking companies can still make money by pumping oil out of their existing wells until they are dry, according to Speer.

“At the end of the day, (pumping from an existing well) is cheaper than drilling a new well,” Speer said. “And if your company is going bankrupt, it’s cash in the door, so you try to run it as long as you can. It’s not enough money to drill new wells, but it kind of keeps you afloat.”

This makes the price of oil and gas this summer and in 2017 more uncertain. If the oil from the existing fracking wells dries up, prices could begin to rise again.

But if the prices rise significantly, drilling fracking wells will become profitable again, bringing more oil onto the market and driving prices back down again. That’s why the Economist has predicted that the price of oil may not rise above around $75 a barrel, the upper-end cost of drilling a new well, at least through 2025.

Still, prices at the gas pump will likely go up some in the spring, Speer said, because that’s when refineries close down for routine maintenance, when people start driving more and when refineries start producing the more expensive summer blends to reduce ozone emissions.

For now, Kansas consumers have more money to spend for the holidays. Kansas refineries are making money. And even Kansas companies that own pipelines and trucks are doing well. That’s because they usually get paid by the volume of oil and gas they transport, and, with prices so low, demand is higher than usual, according to Speer.

“With demand increasing, more trucks are taking gas to stations, pipelines are moving more barrels,” Speer said. “So that would definitely be a benefit to them.”

The big losers now are elsewhere, in places like North Dakota and Texas, where there are fewer wells being drilled and rigs operated than before the price of oil started falling two years ago. Coastal cities may also suffer delays in large offshore drilling projects.

The new climate change agreement that came out of Paris last week could complicate matters even more. As the nearly 200 countries try to increase their use of alternative energy sources and move away from fossil fuels that emit carbon, long-term demand for oil could fall. The longer those drilling projects are delayed, the higher their eventual cost could be as countries begin to factor in the environmental cost of carbon emissions.

Past five years

The last time prices were this low was December 2008, during the start of the financial crisis that led to the recession.



Crude oil is trading at less than $35 per barrel, which is even lower than the price seven years ago. So it’s possible that, even though gas prices typically start to rise in January and February, they may rise later this year and not by as much.

Not lowest prices ever

Although the prices right now are the lowest we’ve seen for some time, historically they are not the lowest. The prices from the late 1980s until about 2004 were lower than they are now, except for a brief rise after 9/11 and the second Iraq War, after being adjusted for inflation. But with the stock of oil so high, prices will likely keep falling and could reach historically low levels by the end of February, according to Speer.



OPEC countries

Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Venezuela

Source: OPEC.org

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