letter from the editor
The Good News and Bad News about Oil Prices
O
n Jan. 7 US benchmark crude-oil contracts dropped below $34 a barrel, according to the Wall Street Journal, the lowest close in more than a
decade. Before the month was out crude had dropped nearly another $10 a barrel.
That is at the heart of a classic—and complicated—good news/bad news situation. What drove the price 2.1% lower that day in early January
were worries about slowing economic growth in China. This was on top of a continuing poor economic outlook in many other areas of the world. Slower economies consume petro- leum at a slower rate. And slow economies are bad news. But it’s good news for those—individuals, industries, airlines—who consume petroleum because the price goes down (and the profits up from some goods and services) when supply exceeds demand. And it’s even better news for consumers when oil producers keep pumping at a rate that exceeds the falling demand. Except that it’s bad news for oil producers, most of whom are struggling—and many of whom are failing—to keep their income above the breakeven point. It’s also bad news for the finances of oil-producing na- tions, some of which need oil revenues to stay afloat. In December 2015, the Journal reported, oil markets were
concerned that crude prices would stay below $40 per barrel. Now they are worried about prices notably lower than that. Last September, analysts at Goldman Sachs raised a ruckus when they predicted oil would have a prolonged stay in $20-a-barrel territory during 2016. The consensus at the time was that oil would be in the mid to high $40 range for the first quarter of the year. Now there is a small but notice- able migration of analysts to Goldman Sachs’ point of view. As this is written in early March a barrel of benchmark
West Texas Intermediate crude closed at $34.66. A price that caused concern in January was viewed almost with a sense of relief in March. And where things go from here is most certainly uncertain. Here are some more good news/bad news situations: The good news. American drivers are benefitting from gasoline prices that are the lowest since 2009, according to
James D. Sawyer Yearbook Editor
the US Energy Information Administration (EIA). In a report issued Jan. 7 the EIA noted US regular retail gasoline prices averaged $2.43 per gallon over the course of 2015, 93 cents a gallon (28%) less than in 2014. This allows Americans to drive more and to buy more of the less fuel efficient pickups and SUVs they favor over cars. The bad news. More miles being driven means more gasoline is being consumed and thus more carbon is being released into the air. And an article in Automotive News noted that, “While the US auto industry set a sales record in 2015, the average fuel economy of light vehicles purchased last year fell below 25 mpg (10.6 km/l) for the first time in nearly two years, a University of Michigan Transportation Research Institute report said. The average window sticker rating of cars, SUVs, vans and pickups purchased in December was 24.9 mpg—down from November’s revised 25.1 mpg.” This is due almost entirely to a higher mix of pickups and SUVs being sold during the course of the year. Even more bad news. The federally-mandated Corporate
Average Fuel Economy (CAFE) standard for 2016 is 35.5 mpg (15 km/l). This number is an illusion that comes about through a very complicated series of mental and mathematical gym- nastics arrived using lower real-world fuel economy numbers. Still, the CAFE numbers indicate that a day of reckoning is not far off before automakers are fined for selling too many vehicles that do not meet the standards. And there is one greatly ironic facet of this complicated oil-based good news/bad news situation. One would think that low petroleum prices would hit wind and solar power companies and hit them hard. Just the opposite is true. “Wind and solar power appear set for a record-breaking year in 2016 as a clean-energy construction boom gains momentum in spite of a global glut of cheap fossil fuels,” the Washington Post reported Jan. 1. This comes on the heels of installation rates for these alternate energy sources that soared in 2015. A large part of these gains are based on the extension of tax credits for these forms of energy and increased efficiency driven by technological advancements.
64 — Energy Manufacturing 2016
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