A Purdue University energy economist believes gas prices could continue a recent plunge. Wally Tyner says the lower prices have been a “huge boost” to the economy, helping to increase the gross domestic product by about 1 percent. He says the dip can be attributed to several international and domestic factors including OPEC's decision to not cut production, the U.S. boosting output and slow economic growth in key European and Asian markets. Tyner tells Inside INdiana Business the average gas price in the Midwest could drop below $2.00 per gallon. He says a negative consequence of the lower prices could be a reduction in oil companies' investment in exploration efforts and work force.
Tyner says the key to sustained lower prices is the long-term nature of oil industry investments, which causes a lag in response to changes.
December 15, 2014
WEST LAFAYETTE, Ind. – How low can they go?
We're talking gas prices here.
Plummeting gasoline prices over the past couple of months are expected to remain low through at least the spring, signaling generally good fortunes for the nation's economy, said Purdue University energy economist Wally Tyner.
The national average price for regular unleaded gasoline was $2.61 per gallon as of Dec. 12. That is 59 cents lower than a year ago. Indiana prices were averaging about $2.52, and prices in the Lafayette area were even lower, averaging $2.32.
How much more prices will fall is difficult to predict; it will depend on the cost of a barrel of crude oil. Running about $105 for the past couple of years, it was below $59 last week.
“And it is likely to go even lower,” Tyner said. “On balance, this decrease in gasoline prices is quite good for the economy.”
He noted that crude oil prices have fallen $45 over the past few months – enough to increase the U.S. gross domestic product about 1 percent. That is significant considering the GDP – the value of the nation's goods and services – is increasing by a rate of 3 percent annually.
“That's a huge boost to the economy,” Tyner said. “It is providing consumers extra income they can spend on other goods and services, which stimulates the economy.”
On the other hand, Tyner said crude oil prices have fallen to the point that the oil industry, including exploration companies, will be cutting their investment budgets for 2015, likely leading to some job losses in that industry. Still, he expects that refining will continue to be profitable.
Gasoline prices have been falling primarily for several reasons:
-OPEC decided in late November not to cut production, a decision that sent crude oil prices tumbling further.
-U.S. crude oil production has increased by 1 million barrels per day in each of the past three years, Tyner said. “This U.S. supply increase is a major part of the current price story.”
-Production also has increased in North Africa and the Middle East. “Libya, for example, is now producing a lot more, but it is not clear how long that will last,” Tyner said.
-While the U.S. economy is doing well, the economies of the rest of the world are not. Europe and Japan are growing at less than 1 percent per year, and China and India are growing more slowly than normal. Russia is in recession. Tyner said that because oil demand is driven by economic growth, when the growth slows so does global demand for crude oil and products.
“So it is the combination of slow growth in demand and the rapid growth in supply that has led to the current plunge in oil and gasoline prices,” Tyner said.
The wild card to gasoline prices always is the element of the unforeseen, such as an unexpected interruption of supply from a disaster or world events. Tyner said there is no planned maintenance at refineries that would reduce output for the rest of 2014.
Source: Purdue University