The intrigue, impact & warning of lower gas prices

Natural gas flares from a flare-head at the Orvis State well on the Evanson family farm in McKenzie County, North Dakota, east of Arnegard and west of Watford City. (PHOTO: Tim Evanson, Flickr Creative Commons)

Natural gas flares from a flare-head at the Orvis State well on the Evanson family farm in McKenzie County, North Dakota, east of Arnegard and west of Watford City. (PHOTO: Tim Evanson, Flickr Creative Commons)

I live in the woods of Northern Minnesota’s western Mesabi Iron Range, 27 miles from the town where my kids go to school and 27 miles from the town where I work. That was a choice. We live on old family land. Nevertheless, public transit is not available and the cost of gasoline is a significant part of our budget. When gas was at $4 in recent years, we calculated that a trip to town and back cost $12, not counting vehicle expenses like insurance and maintenance. Just gas.

That’s every “Mom, I don’t feel good,” “Dad, I got invited to a birthday party,” “I’d love to meet to talk about [community project initiative brainstorming thing],” “Screw it, let’s get pizza.” Daily commute, Scouts, the works. Every one: $12 a shot.

So, yeah. Gas prices are down and we like that. A trip to town now costs half as much: $6 if you gas up in Hibbing, $7 if you gas up in Grand Rapids. That adds up. And it’s adding up for people all over the country, not just woodsfolk like us.

The cost of gas, however, like any commodity, cannot be simply explained or predicted in a modern global economy constantly unrolling new technology and efficiencies. Most folks have an understanding of the concept of supply and demand, however, and that’s enough to speculate. And how!

For instance, domestic oil and gas production in the United States has risen dramatically in recent years. Fracking for shale oil in many states, including prodigious oil drilling in western North Dakota, has created remarkable new supplies.

Meantime, the U.S. is importing less foreign oil. Also good news, right? So there’s more American oil (America!) and less foreign oil (YEAH!). This ultimately dour piece from Michael Snyder of Global Research in Canada starts with this remarkable observation:

It would be difficult to overstate the importance of the shale oil boom to the U.S. economy. Thanks to this boom, the United States has become the largest oil producer on the entire planet.

Yes, the U.S. now actually produces more oil than either Saudi Arabia or Russia. This “revolution” has resulted in the creation of millions of jobs since the last recession, and it has been one of the key factors that has kept the percentage of Americans that are employed fairly stable.

Unfortunately, the shale oil boom is coming to an abrupt end.

Snyder goes on to show that Mideast oil producers are essentially entering into “gas wars” with the U.S. to help drive down prices. Since the method of extracting oil and gas from American wells is much more expensive, they hope to shut of those wells with low prices. Indeed, the boomtowns of Western North Dakota now see the boom fading. Leader there are preparing for a long economic plateau with occasional downturns, something we here on the Iron Range know quite well.

That’s a compelling international economic tale of intrigue, all right, but what if it’s only one cause of the lower prices?There’s another argument that says that the reason for the low prices is as much attributable to lower demand as it is to higher supply. We’re using less gas.

That all feeds into the notion that what we’re seeing here is not about gas at all, but about a global economy preparing to pop another bubble. If that’s the case, there’s no reason to get too giddy about gas prices. Indeed, speaking from my middle class, single-income experience, filling my tank for less than $25 does not making me feel rich or more secure. Who in America today has a job that is truly stable? A new owner, a new election, a new technology could upend your world at any time. So it goes.

What should you do in this time of low gas prices? Replenish your savings. Pay down your debts, if you have any. Continue to imagine a world where cheap gas is a thing of the past. My wife Christina has some good ideas at her Northern Cheapskate blog, if you’re interested.

America, collectively, seems to lack patience to commit to a long term economic and public sector strategy. As long as that remains true we will bounce up and down, always feeling that some better time existed in the past. That’s a false memory. The truth is that we have the resources and technology now to make a great world. Or, perhaps, had such opportunities … if we go on like this.


  1. Thank-you for that thoughtful, well-written piece. Long term thinking and planning are no longer a concern of voters or would-be legislators – a staggering short-sightedness you give good advice – I believe that future generations (if any) will marvel that we handed over the helm of the ship of state to corporate and armaments profiteers.

  2. Great article, Aaron.
    There is always more at work than what is seen at first glance. While one of Saudi Arabia’s goals may be to bankrupt the shale oil industry, I recently read that there are investment groups on Wall Street just waiting for this to happen, so they can swoop in & pick up the assets at pennies on the dollar. They will pick up production again when it is profitable for them, but will have much less in start up costs involved.
    It’s like a saying I heard in the late 80’s, “The pioneers get the arrows. The settlers get the land.”

    I certainly like your idea about saving & paying down your debt. I would add, “For God sake, Don’t buy a gas-guzzling Suburban!”

  3. Tammy Swedberglund says

    Like core tenets of this other shrewd blog , writ public , it might make sound policy sense to stop viewing the “more dollars in pockets ” lower gallon ” spread” as a catalytic consumer discretionary windfall ( basically a big-box sugar high) and instead use the lower pricing as a relatively painless entry point to begin a floating rate gasoline tax . Replenish the public savings and be able to compete more favorably on the debt markets if / when people get serious about building competitive , multi-modal public transit . Or shriek in libertarian terror and deride it as a punishingly regressive means to a high-density urban planning end . And while they do like to do like ‘dat – don’t they ever – do note that Northstar ridership numbers are trending higher even sub-$3-4 / gl , to give an example . This from Anoka , even . And starting to get serious in Cali about bullet trains ( some cherry picking, sure, but coasts innovate and inland implements) .

  4. Not a fan of raising taxes in times of lower gas prices because when price goes back up tax doesn’t drop off. Drill more here and finally get off foreign oil dependency, build new refineries, get XL pipeline up and running. Amazing to me that all the same folks associated with White House that said shale boom wouldn’t effect gas prices,was bad for America and environment now are taking credit for 2.00 a gallon gas. You would either have to live in cave or live in academia bliss not to understand if you have more of any product available by multiple suppliers the price goes down. Since the US dollar I’d tied to oil world wide our dropping any imported oil will have economic impact but I’ll take short term pain for long term oil independence.

  5. The price dip for oil did not occur with the rise of available oil from either the shale fracking or from the tar sands. That rise occurred during a time when oil continued to increase in price, and was in place well before the current dip. Demand soaked up the new supplies, and prices were maintained.

    Two things did happen in the time frame of the drop in oil prices. The first was the return of Libya to the international oil market after the Libyan supplies had been interrupted by collapse of civil order in Libya following the Arab Spring. That brought a supply of oil nearly as big as the total from shale fracking onto the market all at once.

    But more important has been the economic downturn in Europe which, since the EU is their biggest customer, spread rapidly to China and India, creating a drop in oil demand in the face of rising supplies. And that drove the oil prices down, just as they were driven down in the recession last decade.

    Economic contraction is the surest way in today’s international world to drive down demand for raw materials, including oil. The same events are driving down prices of copper and other metals, leading to the lowering of interest in development of new metal mining that Aaron noted in an earlier post. If the world economy was growing at earlier rates, the new supplied of oil would be easily absorbed and prices maintained.

    We have the contractive economic policies of Angela Merkel and her German bankers and of David Cameron to thank for this — Europe just officially went into deflation in this week’s news, and the EU is in recession. As long as their policies continue, we can count on reduced demand holding down prices for oil. We just need to hope that the economic contraction does not spread from Europe, China, and India to the US, as was suggested by the Michael Snyder article that Aaron quotes here. We will certainly — it’s happening already — see contraction in the economies of states in the oil patch, but hopefully we will see continuation of the policies in both the US and MN governments that will protect us from catching that contagion.

  6. If contraction added 100M extra available barrels of oil to the market weekly to cause the price dip wouldn’t adding 100M extra barrels to a non contracting economy have the same effect? It is SUPPLY and demand that determines price or is it just demand.

  7. Partly true and partly not. So far for the last twenty years it has not been possible to produce enough supply in expanding economic conditions to drive down or even stabilize the price of oil. In expanding economic conditions there has been a market for all the oil that could be brought to market, at existing and inflating prices. It has only been under conditions of economic contraction that oil prices have receded in the last 25 or more years. This seems to be predominately due to an almost limitless added demand for oil in India and China as long as the world economy is expanding.

    There have been times in the past when that has not been true, especially when Middle Eastern, African, and Latin American sources have been brought on line, but that was forty or more years ago, before the markets in India and China, and to a lessor extent other BRICS countries, were significant. Increased demand in China alone has outstripped any increases in supply in the last decade, and in fact the Chinese until recently were scrambling to lock up as much oil supply as they could.

    The only large incompletely exploited oil resources in the world right now are potential supplies in Kazakhstan. It is uncertain how much reserves the Kazakhstani’s have, since they have not been fully evaluated. However, during the last recession the Chinese moved aggressively to lock up as much of the Kazakhstani oil as they could, while Western economies oil demand contracted, and to plan and build pipelines across the Kazakhstan-China border, so it is highly likely that eventually most oil output added there is going to be consumed in China. Otherwise, potential new sources elsewhere are not significant enough to have much impact, barring some new discovery.

    As you said earlier, the availability of shale oil in the US helps the US, but primarily in the impact on import-export balance, not on supply-demand issues. The oil in the Keystone pipeline, of course, is Canadian oil that will add to our balance of payments issues.

    Interestingly, although the politicians continue to be very interested in Keystone, and Keystone will supply construction jobs along its route, the oil companies are at the moment willing to allow Keystone to simmer on the back burner, since at the moment the demand for tar sands oil, which is the most expensive to produce once on line (shale fracking and lateral drilling are more expensive to bring on line, which is why interest in new wells in ND and Texas is collapsing,) is much lower. If — or more likely when — economic expansion once again drives up the price of oil, then Keystone will be much more interesting to them. A similar deal, as I said earlier, to the loss of interest in Twin Metals at the moment in the face of declining copper and nickel prices.)

  8. Another point concerning the Saudis. In the early stages of this current oil bust, the Saudis tried to engineer a cut of 5% in oil production, a response that they have used in the past, and suggested that further cuts might be warranted depending on market conditions.. However, when the Russians made it clear that due to their extreme dependence on oil and gas revenues to float their economy they would react to any decreases in production elsewhere by ramping up their own production to soak up available market share, the Saudis reversed their stance and abandoned any restraint on production. They seem not so much to be trying to force other producers to stop production and expansion as to get other producers on board a market control scheme whereby all producers, both in and out of OPEC, would decrease production in the face of declines in demand and price, and increase production in the face of increases in demand and price, The Saudis seem to be suggesting that they will make that step themselves only if all producers follow along. As noted above, because of high costs of production in shale oil, tar sands, and Arctic and offshore oil, many North American producers may end up going along with this on a de facto basis if prices remain in the sub-$60 range for very long, since those prices are lower than their costs of production in many cases.

  9. I don’t have a college degree but have been in business my whole life. Whenever I was faced with a complex problem the 1st thing I did was go back to the basics and break it down to its simplest form. I see so many articles that are so confusing on the oil issue that my mind explodes. I know from business if you add product to an industry that is in high demand from multiple sources that are competing the price on that product goes down. Every time. This reminds me of the whole housing collapse , they tried blaming it on big banks, Fanny, Freddie, Wall Street firms and every one they could. The whole thing started with the push to get everyone a home in the Clinton yrs, subprime loans (with 0% down) and easy money for unqualified buyers being pushed by idiots in DC. By the end it was a Govt bailout and so damned confusing no one knew what was going on. This oil deal looks the same. More oil produced the less it costs seems like the simplest answer to this uneducated old guy.

  10. The point you are missing is pent-up demand.

    Although a lot of the fluctuation of demand for oil in the face of economic expansion and contraction is due to increases and decreases in commercial use of oil by ships, trucks, machinery, etc., the underlying issue is a huge pool of unmet demand existing in developing countries that is “rationed” by economic expansion and contraction.

    There are literally billions of people in the developing world who dream of replacing their bicycles with mopeds, their mopeds with motorcycles, their motorcycles with mini-cars, etc., on up to Bentley’s and Ferrari’s. The same is true of replacing oxen with tractors, replacing pedi-carriers with small trucks, replacing small trucks with fleets of bigger trucks. The same is true of desire to travel by train, plane, or bus to visit relatives or religious sites.

    All of this demand is held back by the inability of people to afford the things they crave. In good times, with more money in their economies, the ability to reach some of those dreams increases. In bad times, the ability decreases and the mini-cab may end up repossessed and the driver back on a pedi-cab.

    All of this is accompanied by more and more use of oil. The fulfillment of this demand has turned cities like Mumbai, Shanghai, and so on into the worst air polluted places on Earth.

    Increased supply of oil in the face of this enormous pent-up demand is like pouring a tea-kettle of boiling water into Lake Superior and expecting the temperature of the lake to rise.

    Oil does respond to supply and demand, but in the face of potential demand that vastly exceeds potential and real supply, the controlling factor is not ordinary supply and demand, but rather fluctuation of demand based on economic conditions. And that is exactly what we are seeing now.

    I will ignore your off-topic Fox News explanation of the Bush recession, except to say that even Alan Greenspan, the noted Ayn Rand disciple and apostle of market economics, disagrees with it.

  11. Increased supply of oil in the face of pent up demand decreases price, how can oil not be affected by the supply/demand balance that exists in all other sectors? Bad lending practices caused housing bubble to collapse- plain and simple- more oil in market prices go down- plain and simple. The mind bending twists folks put on situations to achieve a goal is amazing. The lefts feeling that oil is bad for the world leads to the narrative that more oil

  12. Is worse

  13. You’ve nailed it on this one Ken. My guess is your common sense, wise thinking led to you having very gratifying successful career…

  14. In this case, the pent-up demand is activated only when the people who are the source of the demand have enough money to buy oil products. They have enough money to buy oil products only when the economies of their countries are prospering. Economic contractions remove them from the market, making the demand independent of supply prices, and breaking the usual cycle. Increased oil supplies — within the parameters that are possible — cannot drive prices low enough to recruit these customers.

    It is those customers dropping out of the market that is the primary driver for the lower prices right now, and they are due to the impact of the economic contractions in Europe that result in decreased economic performance in India and China.

    So yes it is supply and demand, but the oil market is functioning independent of supply. The markets underwent a similar and so far even deeper dip in 2008-2009, well before any of the new supplies were on line. Prices were down then and are down now because demand is down. The added new — actually returning — supply from Libya may be adding to the mix, but the driving force is economic shrinkage.

    This has nothing to do with virtue or non-virtue of oil exploitation, or of left or right wing politics. All the new exploitation, after all, occurred under the Obama administration and its Energy Department and EPA, so it was obviously approved by them. There are many liberals who are opposed to fracking, but until the recent decision in New York State no one of any power among Democrat office holders had adopted a position that stopped or delayed fracking.

    What is happening with oil is a simple economic fact related to the way the world works now. It does not mean that oil exploitation is bad, just that it carries financial risks that many people may have believed it did not, and that those risks are controlled primarily by factors outside the oil industry itself, in the larger economic world.

    We are once again arguing about whether your opinion trumps facts. You believe that, as you have said in the past. I don’t.

  15. You are right that bad lending practices, coupled with bad financial industry practices, did cause the Bush recession. What your narrative misses is that the bad practice was almost entirely in the private sector and has nothing to do with the anti-redlining policies of the Clinton administration.

    As late as 2004 — when Fannie Mae and Freddie Mac joined the debacle after pressure from their own shareholders, the companies selling them mortgages, and the Bush administration to start buying subprime mortgages — over 80% of subprime mortgages were issued and held by private sources. Those private mortgages eventually had a much higher default rate than those held by public or semi-public entities. The main drivers were companies like Countrywide and IndyMac and their boiler room sales operations and the “asset backed” security packages — and their associated credit default swaps — created by Goldman Sachs and adopted enthusiastically by companies like Lehman Brothers, Merrill Lynch, and others. They had successfully created a way to bypass all the government associated lending agencies and their regulations to create the subprime “zero down,” “balloon loans,” and “liar’s loans” that paid higher interest rates and higher origination fees — and therefore higher profits — but eventually led to the collapse. Their actions were based on two obviously (now, at least) erroneous assumptions: that real estate prices would always go up, and that based on mortgage default rates from the past a large pool of poor quality mortgages would be a safe investment because some magic meant that although one risky mortgage had a potential for failure a pool of a thousand risky mortgages was somehow safe.

    Yes, Clinton does bear some responsibility for this, something he has acknowledged himself. He got on board the financial industry deregulation that led to this mess at the urging of Larry Summers. The ideas and legal changes, however, were the brainchild of and were proposed and passed in the GOP controlled Senate and House by Senator Phil Gramm and his fellow Texans Dick Armey and Tom Delay. They drew some Democrat support, partly at the urging of Summers and Clinton, and Clinton signed the bills, but this was a GOP congress and a GOP program.

    As I say, no less of a conservative economic stalwart than Alan Greenspan commented after the fact that it amazed him that financially and economically sophisticated firms like the big investment bankers could have made decisions that had such a destructive impact on their own well being and, of course, that of the country, and ventured the opinion that some regulation may be necessary after all.

    There is no one who knows anything about economics — conservative, liberal, or in between — who believes that the disastrous “race to the bottom” by the banking industry following deregulation had anything to do with the anti-redlining measures. There is no data evidence suggesting that that is true. That is solely a fiction of Fox News and similar sources faced with the ideological embarrassment that Greenspan so eloquently described.

    There is really nothing more to talk about here, since we are once again talking about an argument that your opinion trumps facts. I respect you and R-47’s right to believe that. I just don’t believe it myself.

    • Thanks, Gerald for your astute and fact centered economic narrative. Thanks for bringing in the economic history of 30 years with so little spin.

  16. David Gray says

    After so much verbosity you really should be able to end better than with a canard like “There is really nothing more to talk about here, since we are once again talking about an argument that your opinion trumps facts.” Weak and insipid.

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