10 reasons why falling oil prices is good for the U.S. and replacement fuels

While they might not make the Late Show with David Letterman, here are ten reasons why the fall in oil and gas prices, if it is sustained for a while, is, on balance, good for the U.S. and replacement fuels.

  1. U.S. consumers are getting a price break. While the numbers differ by researchers, most indicate that on average they have saved near $80 billion. According to The Wall Street Journal, every one cent drop in gasoline adds approximately a billion dollars to nationwide household consumption.
  2. Low- and moderate-income households will have extra money for basic goods and services, including housing, health care and transportation to work.
  3. Increased consumer spending will be good for the economy and overall job growth. Because of the slowdown in production and the loss of jobs in the oil shale areas and Alaska, the net positive impact on GNP will be relatively small, higher at first as consumers make larger purchases, and then lower as oil field economic declines are reflected in GNP.
  4. Low prices for oil and gas will impede drilling in tight oil areas and give the nation time to develop much-needed regulations to protect environmentally sensitive areas. Oil is now under $80 a barrel. The price is getting close to the cost of drilling. Comments from producers and oil experts seem to suggest that $70-75 per barrel would begin to generate negative risk analyses.
  5. Low prices for oil and gas will make it tough on Russia to avoid the impact of U.S. and EU sanctions. Russia needs to export oil and gas to secure revenue to meet budget constraints. Its drilling and distribution costs will remain higher than current low global and U.S. prices.
  6. Low prices of oil and gas will reduce U.S. need to import oil and help improve U.S. balance of payments. Imports now are about 30 percent of oil used in the nation.
  7. Low prices of oil and gas will further reduce dependence on Middle East oil and enhance U.S. security as well as reduce the need to rely on military intervention. While the Saudis and allies in OPEC may try to undercut the price of oil per barrel in the U.S., it is not likely that they can sustain a lower cost and meet domestic budget needs.
  8. Low prices of oil and gas will create tension within OPEC. Some nations desiring to improve market share may desire to keep oil prices low to sustain market share, others may want to increase prices and production to sustain, if not increase, revenue.
  9. Low prices of oil and gas will spur growth in developing economies.
  10. Low prices for oil and gas will likely secure oil company interests in alternative fuels. It may also compel coalitions of environmentalists and others concerned with emissions and other pollutants to push for open fuel markets and natural gas based ethanol, methanol and cellulosic-based fuels as well as a range of renewable fuels.

We haven’t reached fuel Nirvana. The differential between gasoline and corn-based E85 has lessened in most areas of the nation and now appears less than the 20-23 percent needed to get consumers to think about switching to alternative fuels like E85. But cheaper replacement fuels appear on the horizon (e.g., natural gas-based ethanol) and competition in the supply chain likely will reduce their prices. Significantly, in terms of alternative replacement fuels, oil and gas prices are likely to increase relatively soon, because of: continuing tensions in the Middle East, a change of heart on the part of the Saudis concerning maintaining low prices, the increased cost of drilling for tight oil and slow improvements in the U.S. economy resulting in increased demand. The recent decline in hybrid, plug-in and electric car sales in the U.S. follows historical patterns. Cheap gas or perceived cheap gas causes some Americans to switch to larger vehicles (e.g., SUVs) and, understandably, for some, to temporarily forget environmental objectives. But, paraphrasing and editing Gov. Schwarzenegger’s admonition or warning in one of his films, unfortunately high gas prices “will be back…” and early responders to the decline of gasoline prices may end up with hard-to-sell, older, gas-guzzling dinosaurs — unless, of course, they are flex-fuel vehicles.

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