CHAMPAIGN — Ten years ago, other nations held many of the cards that controlled the prices you and I pay as the gas pump.
Then came the shale revolution. The development of technology that allows oil to be extracted from organic-rich fine-grained sedimentary rock has caused oil prices to collapse and has changed the world’s oil marketplace from a seller’s market to a buyer’s market, according to an energy economist at Southern Methodist University.
Bernard Weinstein, associate director of the Maguire Energy Institute and an adjunct professor of business economics in the Cox School of Business, visited central Illinois earlier this month to talk to the World Affairs Council of Central Illinois about the future of gas prices.
The bottom line for motorists in East Central Illinois: Expect gas prices to remain below $2.50 a gallon for the next two years, Weinstein said.
“I think the prices will probably stay about where they are today,” he said.
Weinstein says several factors go into the price at the pump, including the cost of crude oil, the cost to refine that oil, transporting products from the wellhead to the refinery, delivery costs to the gas station and the gas station’s markup.
“Gasoline prices dropped in the past year as a reflection on the global glut of oil,” Weinstein told The News-Gazette.
According to Weinstein, approximately 93 million barrels of oil are produced each day worldwide, but only 91 million barrels of oil are used a day.
“There is an excess of supply, and that excess came about during the shale revolution,” Weinstein said. “With all the additional supply and sluggish demand for oil, the result is a big drop in oil prices.”
The shale industry, in which gas is drilled from the ground through a process called hydraulic fracturing or “fracking,” has boomed in recent years, partly as a result of access to cheap financing, helped to push global oil prices to record lows.
“A decade ago, we thought we were running out of oil and gas,” he said. “Then came the shale revolution. The biggest shale places are North Dakota, Pennsylvania, Texas and Montana.”
Meanwhile, major discoveries of conventional oil have been made in the Gulf of Mexico, off the coast of Africa and in the China Sea, he said.
“As a result, United States production has doubled in the past seven years,” Weinstein said. “We are producing a lot more oil at home.”
He said the U.S. imported 55 percent of its oil a decade ago, making the nation heavily dependent on the Middle East.
This year, only 30 percent of U.S. oil consumption is imported, according to Weinstein.
When Saudi Arabia cut back on pumping oil in 1985, it lost ground to the U.S. and Soviet Union. New U.S. shale fields have made it the top producer.
Since the U.S. isn’t using so much foreign oil, Weinstein said, that oil is chasing customers in other countries, increasing their supplies.
Meanwhile, in places like China, where some economists previously predicted a huge increase in demand for oil, the economy grew at a slower pace than expected.
“It didn’t materialize,” Weinstein said. “China’s growth went from 11 percent annually to 5 or 5.5 percent.”
And he said President Barack Obama’s veto of the Keystone Pipeline likely won’t affect gas prices.
“The fact the pipeline isn’t being built won’t have any impact on prices,” he said. “But it is a slap in the face to our friends in Canada, who are ticked off about this thing.”
The biggest beneficiary of Obama’s rejection may be railroad companies, since the oil that was to be shipped by the pipeline is still being shipped, only by train.
“The railroads that carry the oil are very happy,” he said.
But he believes continued low oil prices will have an effect on the oil companies.
“We had 200,000 announced layoffs by the oil industry and their suppliers over the past 12 months,” he said. “Every day they announce layoffs.”
He predicts some small- and medium-sized production companies that borrowed money banking on high gas prices are going to face bankruptcy.
“Nobody is lending money to the oil or gas industry,” he said. “The medium and small companies are hurting.”
Source: Beth Mosher, AAA Chicago Motor Club
This article was written by Tim Mitchell from The News-Gazette, Champaign-Urbana, Ill. and was legally licensed through the NewsCred publisher network.