Remember the "super spike"?
That phrase entered our vocabulary five years ago this month
when crude oil prices suddenly surged to $120 a barrel. By July
2008, prices surged to $140 a barrel, which surely played a role
in pushing the global economic into a deep crisis.
Consumers had to slash discretionary spending to have
enoughmoney to fill up their gas tanks, airline carriers were hit
with a rising tide of losses, and many companies saw theirprofit
margins squeezed as costs rose faster thanrevenues . Though crude
oil prices tumbled to just $40 a barrel byyear 's end, the global
economic damage was already done.
Now, as the U.S.economy starts to percolate again, some have
expressed concern that the world's largest economy may again lead
a surge in demand -- and prices -- for crude oil. Yet a pair
offactors implies that it's quite unlikely we'll see another
super spike and we may in fact be on the cusp of sustainably
lower oil prices.
Those two factors: increasing energy efficiency and rising
domestic energy production.
Falling Marginal Demand For Gasoline
When the super spike hit in the summer of 2008, the average new
car got 21.4 mpg (on a combined highway/city cycle). By the end
of 2012, that figure had risen to 23.9 mpg, and based on current
trends, should exceed 25 mpg by 2015.
The rising efficiency has led the Energy Information
) to predict that U.S. gasoline consumptionwill be 5.9% lower
this summer than it was in 2007 and at levels not seen since
2001. (As an added benefit, greenhouse gas emissions from
automobiles have fallen 22% since 2007, according to the
University of Michigan Eco-DrivingIndex .)
You can already see the effects at the pump. "The annual
average regular gasoline retail price is projected to decline
from $3.63 per gallon in 2012 to $3.50 per gallon in 2013 and to
$3.39 per gallon in 2014," predict the EIA'seconomists .
Yet that forecast is starting to look too conservative.
Simplyput , rising production could push gasoline prices to just
$3 a gallon by next year. Let's do the math.
Shale: There's Oil, Too
Much of the analysis of the recent shale/fracking revolution has
focused on its stunning alteration of the natural gas landscape.
Yet many gas wells also produce prodigious amounts of crude oil
as well, which explains our nation's steady surge in oil
production. The U.S. produced 6.5 million barrels of crude every
day in 2012, and the EIA expects that figure to rise to 7.3
million this year and 7.9 million in 2014. That's a 22% increase
in just two years.
Of course, rising domestic production means that oil importers
will send less crude our way. Yet oil is a globally
fungiblecommodity , and as more oil is redirected to other
markets, the stage may be set for a glut that send global oil
prices well lower.
The Long-Term Picture Gets Brighter
Now, let's look at these two factors over the longer haul.
First, domestic oil production is expected to keep on rising,
as the shale revolution grows yet deeper. That's why some
economists think we may become energy-independent within five or
six years. The United States is the world's largest oil importer,
and removing the largest buyer from themarket would have profound
effects in pricing and demand.
Second, automakers face ever-tightening fuel standards, which
will make a serious dent in U.S. gasoline consumption. In August
2012, the Obama administration and 13 automakers agreed on new
corporate average fuel economy (
) standards for small and large cars and light and big trucks
(which are aggregated here into just two categories).
Blended CAFE Standards For Cars And Trucks
As you can see, the average new car on the road will be
subject to an increase of roughly 1 mpg each year for the next
decade. As a result, U.S. energy consumption is on track to keep
falling at a steady pace.
Winners And Losers
Frankly, rising domestic energy production and increasing energy
efficiency will generate few losers. The global energy producers,
especially in the Middle East, will suffer from falling demand
and pricing. And any automaker that struggles to meet
increasingly stringent fuel economy regulations may pay hefty
Yet consumers will be a clear winner. And we can get a clear
read how consumers will benefit.
Let's look at a typical consumer who drives 12,000 miles a
year in a car that gets 22 mpg and pays $3.65 for a gallon of
gas. The total annual fuel bill comes to $1,989. Fast-forward
three years and assume that consumer buys a new car that gets 30
mpg and that gasoline prices fall to $2.80 a gallon. The annual
gasoline tab falls to just $1,120. That's $869 of new-found
Consumers who use oil to heat their homes also stand to
benefit from a drop in crude prices. Otherbeneficiaries include
consumer discretionary companies such as restaurant chains,
travel and leisure firms in the lodging and hospitality segment,
and entertainment companies. Trucking firms would also benefit as
falling diesel prices helps to make them more competitive with
their rail-based rivals.
Also, don't forget the airline carriers, who will benefit from
a more flush consumer and also from falling jet fuel prices. As I
noted a year ago, airline carries saw their collective fuel bill
rise by $1.8 billion in the first quarter of 2012 (compared with
the year-ago quarter), though fuel bills are now dropping, and as
crude oil prices move lower, could become a powerful tailwind for
airline industry profits. (Indeed,
Delta Airlines' (
unexpected announcement of adividend and share buyback program
shows just how profitable this industry has already become .)
Risks to Consider:
Middle East tensions are always a threat to derail the oil
markets. And if China's economy starts to accelerate, then it
might see an upturn in oil demand thatoffsets U.S.
Action to Take -->
It's time to start researching companies that might be affected
by a steady drop in crude oil prices. In addition to the
companies noted above, many manufacturers use a large amount of
crude oil in their production.
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