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Why Gas Won't Go Back To $3 a Gallon

Consumer Affairs reports the following:

Gasoline prices rose late last year, at a time when prices at the pump normally go down.

The normal decrease is because the nation’s refineries have completed the switch-over to winter grade gasoline, which is cheaper to produce. Consumers also tend to drive less in the late fall and early winter, reducing demand.

So what was behind the uncharacteristic price rise? The price of oil, pure and simple.

OPEC, primarily Saudi Arabia, agreed to cut back oil production. Even big non-OPEC producers, like Russia, vowed to produce less.

Oil traders got the message. The oil glut that has existed for more than two years was about to get a lot smaller. With stockpiles falling, the price had to rise, the thinking went.

$50-plus oil

So far, oil prices have continued to follow that script. The price of both foreign and domestically produced oil has settled in the low $50 range, and that has sent prices at the pump higher. It’s even caused some analysts to suggest that gasoline prices could creep back above $3 a gallon in the coming months, as they have in Hawaii, where pump prices are always higher because of steep transportation costs.

But just how likely is it that we’ll return to the “good old days” for energy speculators? There is one big thing working against gasoline prices going to $3 a gallon and beyond. The U.S. oil industry.

The reason oil prices have been low for more than two years is because Saudi Arabia ramped up production specifically to drive American shale oil producers out of business. While they undoubtedly damaged the industry, driving some small companies out of business, they made those that survived much more efficient. As a result, shale producers can be profitable at $50 a barrel. As the price of oil goes up, these producers will produce more oil in the U.S., helping to offset the declines in the rest of the world.

Ready for a comeback

U.S. shale is ready for a comeback,” declared an article in Business Insider this week, noting that shale companies are starting to raise money for expanded production. Rig counts are at the highest level in more than a year.

Already, consumers may be seeing the results when they fill up. Early this week AAA reported the national average gasoline price had dropped eight days in a row. It has since declined even more, to $2.32 a gallon.

While AAA says the decline may be temporary, depending on whether OPEC can keep its commitment, U.S. producers are likely to keep energy speculators in check. With American producers not bound by any production agreements, it could be very risky for investors to bet on a big increase in oil prices in the months ahead.

So, while some states may get close to $3 a gallon — Hawaii is already there — most states will probably stay below it.

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