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Party at the pump

Copyright © 2015 Albuquerque Journal

The good times are likely to continue well into 2015 for consumers at the gas pumps, with some experts now forecasting New Mexico’s average price per gallon of unleaded to slide to $1.55 by March, before it starts to rebound in the spring.

Consumers can generally thank Saudi Arabia for the latest predictions, said Daniel Fine, associate director of the New Mexico Institute for Mining and Technology’s Center for Energy Policy. That country has pushed the Organization of Petroleum Exporting Countries into a price war with U.S. producers to undercut U.S. oil production and protect Saudi market share, which has declined sharply as a result of America’s shale-gas boom.

Richard Yanez fills his SUV on Jan. 7.

Richard Yanez fills his SUV on Jan. 7.

OPEC refuses to cut back production in its member countries to ease the current glut on the world market, which, in turn, has sent crude prices plummeting since last summer. And, with Saudi Arabia still leading the charge, OPEC is unlikely to back off from its price war any time soon, meaning consumers can expect pump prices to continue their spiral downward, at least until early spring.

“The price at New Mexico’s pumps depends on Saudi Arabia, OPEC and the global market,” said Fine, who was recently appointed project leader for state energy policy. “I forecast very low prices at the pumps until at least April before OPEC takes another look at its production policies.”

The Saudi position seems to have hardened since late December after the U.S. Commerce Department announced that a lightly processed form of crude known as condensate can be sold outside the U.S., in effect partly lifting a ban on oil exports that had been in effect since 1975.

“That means more oil in a market that’s already heavily oversupplied,” Fine said. “That’s very irritating to the Saudis and they’ve stiffened their position because of it, doubling down on efforts to resist any cut in production.”

Fine predicts the price for benchmark West Texas Intermediate will bottom out at $43 per barrel by March, pulling New Mexico’s pump prices down to $1.55 per gallon for unleaded.

Indeed, crude prices have continued to fall since the start of the New Year, with West Texas Intermediate dipping below $50 per barrel as of Jan. 6. That’s less than half what it was last summer, when the price per barrel was over $100.

Relief for consumers

Eli Legarreta fills up his car with gas on Jan. 7. As of Friday, statewide prices were $1.98 for a gallon of regular unleaded.

Eli Legarreta fills up his car with gas on Jan. 7. As of Friday, statewide prices were $1.98 for a gallon of regular unleaded.

As crude prices drop, pump prices follow. The average price per gallon of unleaded in Albuquerque reached $1.87 on Jan. 5, down nearly 10 cents from the week before, according GasBuddy, a Maryland-based organization that tracks prices nationwide. Nationally, the price dropped by about 8 cents in the same period, reaching an average of $2.18 per gallon across the country.

Prices in New Mexico and nationally are now more than $1.12 per gallon lower than they were at this time last year.

That spells a lot of relief for consumers. At current prices, GasBuddy estimates that consumers could save nearly $100 billion this year at the gas pumps.

“As we’ve welcomed in the New Year, gas prices have stayed at their bargain-basement levels in most states,” said Patrick DeHaan, senior petroleum analyst with GasBuddy. “2015 will be a far better year at the pump than what we saw in 2014 and motorists will fare substantially better, shelling out $96 billion less this year.”

In mid-December, the U.S. Energy Information Administration projected annual motor fuel expenditures falling to their lowest level in 11 years in 2015, with average U.S. households expected to spend about $550 less on gasoline than in 2014. And that forecast may now be conservative, since it was based on crude oil prices above $60 per barrel.

Apart from the market glut, declining demand from the still-sluggish world economy, plus marked improvements in fuel efficiency for cars and trucks, are also contributing to price declines. According to the U.S. Environmental Protection Agency, fuel economy for cars has increased from 23.1 miles per gallon for model-year 2005 autos to almost 28 mpg for model-year 2014 vehicles. For trucks, fuel economy increased in the same time frame from 16.9 mpg to 20.1 mpg.

The drop in oil prices is a double-edged sword for New Mexico, since nearly one-third of state revenue comes from the state’s oil and gas production.

In November, state officials cut their revenue estimates of “new money” available for fiscal year 2016 to $141 million, or less than half the $285 million officials had projected in August before oil prices began to drop. Now, officials will likely need to revise projections down again, given that the November estimate was based on oil at $71 per barrel and it’s since fallen below $50.

That means that pay raises for most state workers next year are probably off the table and the amount of money available for new initiatives is likely to be small.

A spring bump?

By March, gasoline prices are expected to start climbing again, at least moderately, since domestic refineries will be doing the annual shift to a cleaner-burning summer blend of gasoline, which is mandated by the EPA but is more expensive to produce. That could add between 35 and 75 cents to the price per gallon, depending on region, said GasBuddy analyst Gregg Laskoski.

“The switch from winter to summer blend starts in late January and culminates in April and May,” Laskoski said. “Usually, the highest prices of the year are right around Memorial Day weekend.”

But apart from that annual price hike – which reverses in the fall as refineries switch back to a cheaper winter blend of gasoline – it’s unclear when crude oil prices will begin climbing again. That depends on today’s market glut subsiding and on OPEC pulling back from its price war with U.S. producers.

As of December, U.S. oil production had not slowed at all. Domestic output hit 9.14 million barrels per day on Dec. 12, the highest daily production rate in the U.S. since 1983, according to the EIA. That’s up from just 6.5 million barrels per day in 2012 and 7.5 million in 2013.

Saudis watching U.S.

The boom has been driven by modern technologies of hydraulic fracturing and horizontal drilling that have allowed producers to bust into hard shale rock to extract pools of hydrocarbons that were ignored in the past. That process – known as unconventional drilling, or tight-oil production – is expected to level off in coming months, which could start pushing crude prices up again.

But OPEC will likely wait to see a marked drop in domestic U.S. production of at least 1.25 million barrels per day before it reconsiders its own policy of deliberately upholding production in OPEC countries to keep world prices low, Fine said.

“Saudi Arabia and OPEC will be looking for a decline in U.S. production to about 7.5 million barrels per day,” Fine said. “I forecast that, at that point, OPEC will begin looking again at its policies.”

Still, even as prices begin to rise again, consumers will likely enjoy pump relief for many months, given that the spiral downward has lasted longer and gone much further than almost anyone predicted, and that foreshadows a lengthy period to reverse the trend.

“When prices do start going up again, it will be from a much lower floor than any of us expected,” Laskoski said.

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