Gas prices - how low will they go?

[Tilikum Turbo]

Originally Posted by Evans, Marv

Didn't take a picture but paid $2.42 at Costco last week. And that was in SoCal!

Naw...$2.42 in So Cal would mean the rest of the country is paying about $1.99/gal(as we get slammed about 40-50 cents extra for clean fuel)

A little..fishy

[jyl]

I previously thought the Saudi actions were mostly targeting other OPEC producers. Now they are talking as if they are targeting North American producers. I'm not any kind of oil expert. Sammy knows far, far more.

If the talk is right, and oil stays at these levels for a year or two years, I wonder how much North American production may decline. I gather that production from a shale well declines 50 to 80 percent after one year. If the producers don't keep drilling, North American production should decline quickly. But why will producers drill new wells if price is at unprofitable levels?

Declining north American production will affect our balance of trade and employment in the oil patch. Normally service companies get hit worst. The existing wells keep pumping as long as they can, because pumping an existing well is profitable at very low prices, and tanker trucks or rail cars keep rolling, refining continued, that side of the industry will feel a gradual decline. But companies involved in drilling of new wells could feel a rapid decline.

I assume there could be a different dynamic between oil and gas, since gas is not a global market.

Presumably a similar thing happens in other producer countries where exploration and drilling is expensive. Think very deep water fields in Brazil, etc.

As other producers in the Middle East and Latin America lose oil revenue, those countries have to cut their budgets, much of which goes to the citizens. Fuel subsidies, food and services, etc. There may be more social unrest and many of those countries are not that stable.

Eventually the decline in production raises global oil prices back, and Saudi has more market share.

Is this good or bad for the US? Lower oil prices helps many industries and consumers. Hurts some like fuel efficient cars, and hurts the oil and gas industry of course. Many of the countries we are in conflict with are very oil dependent and will be weakened - Russia, Iran. Unclear if weaker governments respond by making nice (trying to get sanctions lifted) or by being tough (trying to rouse populist sentiment). On balance I think it is probably net quite positive for the US as a whole.

Except for the deflationary effects. Inflation has not been a threat to the US since the recession, deflation is the threat. Ditto Europe and much of the world. I think oil is not a big enough part of CPI to have a major deflationary effect but I am not sure.