A driver's market for gas Glut of crude oil is helping Americans get back on the road

March 15, 1998|By Jay Saunders

Drivers haven't had it this good in a long time. Crude oil prices recently hit a four-year low, helping to pull inflation-adjusted gasoline prices to their lowest level ever. Nationally, the average price of all grades of gasoline dropped to about $1.07 a gallon at the start of this month and just under $1.03 per gallon for regular.

In the Baltimore area, the wholesale price of regular gasoline averaged a little more than 47 cents per gallon last week, a 26-cent drop from last summer's 73 cents per gallon.

Atlanta has the lowest gasoline prices in the nation. You can pull up to the pump there and buy 80 cents-a-gallon regular gas and with a little searching, you can find some stations selling it even cheaper.

Last week, crude oil was selling for $14.40 a barrel - a drop of $8.36 from the $22.76 a barrel price it sold for just six months ago. The record low prices are the result of a glut of crude oil on the world market. The glut was influenced by the following factors:

Asian economic crisis - The strong demand for gasoline in the United States has served as a beacon for tankers looking to unload cargoes orphaned by poor Asian demand. The crisis began last summer with Thailand's currency devaluation and spread to Malaysia, Indonesia, Hong Kong and South Korea. Estimates say that the Asian economic slowdown has put the equivalent of 1 million barrels a day on the open market, or half of global growth.

While the additional oil has depressed prices, U.S. refiners are still making money and therefore continuing to make large amounts of gasoline. Profit margins are somewhat strong for this normally slow time of year because the demand for gasoline is so high.

The Travel Industry Association of America says motorists are taking advantage of the cheap gas by traveling more. Mild winter weather in much of the United States has lowered the demand for heating oil, which makes more crude oil available to be turned into gasoline.

OPEC - The Organization of Petroleum Exporting Countries, acknowledging blatant production violations among some of its members, decided to raise production quotas late last November by almost 2.5 million barrels a day. The increase pushed OPEC's daily production total to 27.5 million barrels a day. Venezuela and Saudi Arabia and some other nations were already contributing to the glut by cheating on their production quotas before OPEC's officially sanctioned increase.

Venezuela, estimated to be producing about 700,000 barrels a day over its quota, has supported lower oil prices. The Venezuelans maintain that lower oil prices will drive marginal producers (many of them in the United States) out of the market and ensure long-term growth for the strongest producers.

Non-OPEC production - Oil from the North Sea and other non-OPEC sources is expected to help push the global supply up about 2.37 million barrels a day to a total of 75.37 million barrels a day.

Meanwhile, the United Nations has agreed to allow Iraq to double its oil exports under the oil-for-peace agreement forged after the Persian Gulf war. The recent U.N. agreement also allows Iraq to rebuild some of its oil distribution network, which was heavily damaged during the war. In the next six months, this could add 2.35 million barrels a day to the world market.

While U.S. drivers are taking advantage of the glut now, the future is uncertain. Oil economists expect Asia's growth to resume eventually and perhaps even lead to another energy crisis.

"Even if the current economic crisis reduces growth in Asia's oil demand to just 1 percent in each of the next three years, compared with an average 5.2 percent from 1990 to 1995, demand would still be 9 million barrels of oil per day higher in 2010 than in 1996 - an increase greater than the entire current output of Saudi Arabia," Cambridge Energy Research Associates wrote in a recent edition of Foreign Affairs.

Some signs point to overblown production estimates that exaggerate the supply glut. Non-OPEC producers have missed projected growth rates. And quota cheating has taken a large chunk out of OPEC's estimated spare capacity, which raises questions about its ability to increase capacity to meet world needs.

So while gasoline prices look likely to stay relatively low this year, we could see a whole different picture in a year's time. Asia's current crisis seems to be more than a short-term blip in that region's meteoric growth, but an eventual recovery could take global supply by surprise. Recognizing that, oil companies are spending more money to keep production high. That's pressuring prices now, but without drastic advances in already prolific exploration and production technology, drivers in the future may long for the glory days of 1998.

L Jay Saunders is a reporter for Petroleum Intelligence Weekly

Pub Date: 3/15/98

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