Ask any U.S. citizen what they notice first as they are driving to work and you can bet most will say “how much is it going to cost me to fill up my tank today”. Predicting daily fluctuations in gas prices with some degree of accuracy can make even the most seasoned gas and oil expert a little crazy, especially with political instability occurring in oil-rich countries and uncertainty about what OPEC is going to do. However, some basic factors do influence the price of crude oil and can be used as relevant variables to determine whether we start the day paying a reasonable $2 or a painfully high $5 for a gallon of gas.
OPEC (Organization of the Petroleum Exporting Countries)
Established in 1960, OPEC’s primary mission is to “unify and coordinate petroleum policies of OPEC members” and “ensure the stabilization of oil markets…to secure a regular, efficient supply of petroleum to consumers as well as a fair return on capital for petroleum industry investors.” (http://www.opec.org/opec_web/en/about_us/23.html).
Twelve nations comprise OPEC, with the United Arab Emirates and Saudi Arabia having the most influence. Since OPEC is responsible for setting production goals for its members, they control a large part of what determines crude oil prices. When OPEC reduces its output, oil prices rise; when it increases output, oil prices drop.
The original function of OPEC was to prevent extreme fluctuations in gas prices that may negatively affect global economies. However, ongoing political and societal instability in many OPEC nations combined with interest disparities have made it difficult for other countries to predict why and how this cartel will manipulate crude oil prices from one day to the next.
By selling and purchasing oil futures contracts, hedgers and speculators impact oil demand which directly affects crude oil prices. Trucking and airline companies are examples of “hedgers” that buy and sell oil futures contracts as a way to protect them against paying higher oil prices in the future. Alternately, speculators buy and sell oil futures contracts for enhancing their ability to enjoy future profits as well.
U.S. Oil Production Renaissance
Technological advances including hydraulic fracturing and horizontal drilling have significantly impacted global supply, vaulting the United States into first place in worldwide liquids production. In 2006, the U.S. was importing ~13MMBOPD; today it imports ~6MMBOPD. This evaporation of the U.S. market has stunned OPEC, pushing its members to keep pumping oil, which depresses overall pricing, in an effort to drive U.S. shale producers out of business so that it can maintain market share.
U.S. Monetary and Fiscal Policies
Through selling and purchasing U.S. Treasury Securities, the Federal Reserve Board of Governors establishes U. S. monetary policies by increasing or decreasing money supplies. Printing more U. S. currency weakens the dollar against foreign currencies and ultimately lowers crude oil prices. Fiscal policies set by the federal government (how the government spends money) may stimulate economic policy and contribute to further weakening of the dollar–and even lower crude oil prices.
Massive oil spills, hurricanes, tornado outbreaks and nuclear reactor disasters typically impact crude oil prices due to loss of oil manufacturing facilities, broken gas pipelines and the demand for oil to effect repairs. An example of how a natural disaster immediately influences oil prices is the case of Hurricane Katrina and Rita. Collectively, they destroyed over 100 offshore gas and oil platforms and damaged nearly 500 gas and oil pipelines, drastically reducing supplies of crude oil and causing gas prices to exceed $4.50 a gallon.
About Aresco LP
Aresco LP is a privately held Dallas-based exploration and production company actively engaged in developmental drilling, mineral leasing, and production acquisitions in conventional and unconventional oil plays throughout Texas, Oklahoma, and New Mexico. The company specializes in production-driven projects designed to provide income stability and strong growth potential. Aresco’s asset portfolio provides a strong balance of ownership positions in rapidly developing conventional formations and development projects in proven oilfields with decades of active drilling and production. Click here to request info on our current investment opportunities.