Mendoza School of Business

Low gas prices could last into the fall, creating positive ripple effect throughout economy

Published: January 5, 2015 / Author: Jeff Parrott

Gasoline prices dipped to $1.89 per gallon at several Elkhart gas stations Friday, Jan. 2, down 45 percent from its $3.45 level a year ago.

Multiply that kind of savings across the area’s thousands of drivers, and you’ve got what economists call a positive ripple effect. Motorists suddenly have more money to spend on other things, boosting their disposable income and their confidence.

The low pump prices won’t last forever, but they should stick around for at least half of 2015, said Gianna Bern, associate teaching professor of finance at the Mendoza College of Business at the University of Notre Dame.

Bern, whose research interests include global energy markets, said she expects oil prices to remain low for at least six more months, maybe nine months, before starting to inch back upward. She predicts the price of oil, now trading at around $53 per barrel, will return to at least $90 per barrel, which translates into about $4-per-gallon gasoline, in 12 to 18 months.

A lot will depend on what happens at the Organization of the Petroleum Exporting Countries’ (OPEC) next scheduled meeting in June, she said. Gas prices are so low because of a global supply glut caused by increased production in the United States and Canada, fueled largely by the shale oil boom in North Dakota, Texas and Oklahoma, Bern said.

The U.S. is producing about 9 million barrels of oil per day, the most since 1970, and is importing more from Canada. As a result, it is no longer as dependent on oil imports from the Middle East and west Africa, giving the OPEC cartel less power to dictate oil prices. At OPEC’s last meeting in late November, U.S. oil producers were shocked when the group decided against cutting production, despite urgent pleas to do so from smaller OPEC members that are suffering from slumping oil revenues, such as Venezuela, Equador, Angola and Nigeria.

Rather than cut production themselves, OPEC thinks smaller U.S. producers will do so first because their relatively high production costs will no longer be sustainable at such low oil prices, and that’s already starting to happen, she said.

“It’s a question of who will blink first,” Bern said. “I think U.S. production will hold steady (for the next six to nine months). Existing projects will keep working, but new projects will be sidelined.”

Read the entire story on The Elkhart Truth website