Low Gasoline Prices May Not Last

Low gas prices may not last

Since June 2014, oil prices have plunged precipitously, causing a rapid decrease in gasoline prices. Various factors have contributed to the decrease including tapering demand in various countries and increased production in the United States and Canada. While low gas prices are currently enjoyed by consumers, the situation may not be sustainable long-term.

Expensive oil extraction techniques in the U.S. and Canada are less financially sustainable than more traditional drilling methods. The longer oil prices remain below the cost of extracting oil via fraking and other higher cost techniques, the less economically viable the production operation. As a result, oil production in the United States has decreased in recent months. The longer oil prices remain below the cost of production, the fewer drilling operations are likely to commence as existing wells exhaust their supply. This has the potential to translate into lower state income and reduced employment needs in oil production operations.

While oil prices have risen slightly in recent weeks, it is unclear if it’s a sustainable move. Reduced output at production facilities and increased gasoline demand might have prompted prices to move somewhat higher. Global output is also a key factor in future price direction. The Organization of Petroleum Exporting Countries could decrease output at some point to nudge prices in a desired direction. Turmoil in other oil producing countries could also impact output.

Whichever direction oil prices follow long-term, the short-term decrease has improved gasoline affordability and has allowed consumers to operate their vehicles for $1 less per gallon than one year ago. Reduced costs have the potential to increase demand, however, and as consumers expand their driving, demand for mass transportation and alternatively fueled vehicles might experience a slight decrease that lasts as long as fuel prices remain low.

Oil and Gasoline pricing data from the U.S. Energy Information Administration.

Oil and Gasoline pricing data from the U.S. Energy Information Administration.

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