Edumacate me on gas prices, please?
October 30, 2008 12:05 PM Subscribe
Looking for educated guesses on what will happen to the price of gas at the pump for the US resident in 2009.
This whole thing feels like a combination of actual fact, educated guess, and crystal ball nonsense. I know about all of OPEC's production forecasts. I know that the sky is falling. I know that I don't know everything there is to know on this topic. Educate me on the possible outcomes of current conditions so that I can speculate with more knowledge in the bucket.
This whole thing feels like a combination of actual fact, educated guess, and crystal ball nonsense. I know about all of OPEC's production forecasts. I know that the sky is falling. I know that I don't know everything there is to know on this topic. Educate me on the possible outcomes of current conditions so that I can speculate with more knowledge in the bucket.
"No one predicted the massive run-up to $140/barrel, and no one predicted the collapse back towards $60/barrel."
Not true. It's just that it wasn't the same people predicting both.
If you make the assumption that we're not really running out of oil (and you have to call it an assumption, no matter how true you believe it to be), then you only need to compare today's demand versus demand in the past.
I see a continuous, steady increase in demand, which should equate to a steady, reasonable increase in price. In other words, what happened last year doesn't affect what will happen next year.
posted by Dorri732 at 12:26 PM on October 30, 2008
Not true. It's just that it wasn't the same people predicting both.
If you make the assumption that we're not really running out of oil (and you have to call it an assumption, no matter how true you believe it to be), then you only need to compare today's demand versus demand in the past.
I see a continuous, steady increase in demand, which should equate to a steady, reasonable increase in price. In other words, what happened last year doesn't affect what will happen next year.
posted by Dorri732 at 12:26 PM on October 30, 2008
The power of OPEC is fading. Though the story is from 2002, and OPEC includes only 12 countries, while the list of oil-producing states is quite long. How many produce significant amounts? I don't know.
As valkyryn noted, no one really knows. And as the price of gas increases, reserves that were previously financially unfeasible become more reasonable.
posted by filthy light thief at 12:30 PM on October 30, 2008
As valkyryn noted, no one really knows. And as the price of gas increases, reserves that were previously financially unfeasible become more reasonable.
posted by filthy light thief at 12:30 PM on October 30, 2008
Depends if you are a Peak Oil believer or not. If you are, and if we have crossed the 'peak' then the production decline may be severe.
Considering that everyone is predicting growing demand, it's the production angle that will set the price for the coming year/decade/century.
posted by unixrat at 12:40 PM on October 30, 2008
Considering that everyone is predicting growing demand, it's the production angle that will set the price for the coming year/decade/century.
posted by unixrat at 12:40 PM on October 30, 2008
There really aren't educated guesses, and anyone who tells you otherwise is either lying or kidding themselves. No one predicted the massive run-up to $140/barrel, and no one predicted the collapse back towards $60/barrel.
Agreed, although that doesn't necessarily mean that oil prices are completely random. They follow specific trends and events, but those trends and events are very unpredictable. For example:
- The US economy slowing down means less demand for oil, so prices go down.
- Oil is priced in US dollars, so if the dollar loses value to inflation more quickly than usual, oil prices will rise more quickly than usual.
- Bad weather, especially hurricanes in the summer, can disrupt the refining and distribution of oil, which drives down supply and increases price.
- Wars in oil-rich countries also tend to disrupt supply, driving prices up.
- OPEC, although it has lost much of it's power to influence prices in recent years, can artificially raise and lower prices by controlling supply to some extent, and non-OPEC governments can affect oil prices with their own policies.
- Speculators who think oil will increase in value artificially drive up prices by buying futures.
Those are just a few, there are many other factors. The net result is that it's extremely difficult to come up with any kind of strategy to predict oil prices.
posted by burnmp3s at 12:45 PM on October 30, 2008
Agreed, although that doesn't necessarily mean that oil prices are completely random. They follow specific trends and events, but those trends and events are very unpredictable. For example:
- The US economy slowing down means less demand for oil, so prices go down.
- Oil is priced in US dollars, so if the dollar loses value to inflation more quickly than usual, oil prices will rise more quickly than usual.
- Bad weather, especially hurricanes in the summer, can disrupt the refining and distribution of oil, which drives down supply and increases price.
- Wars in oil-rich countries also tend to disrupt supply, driving prices up.
- OPEC, although it has lost much of it's power to influence prices in recent years, can artificially raise and lower prices by controlling supply to some extent, and non-OPEC governments can affect oil prices with their own policies.
- Speculators who think oil will increase in value artificially drive up prices by buying futures.
Those are just a few, there are many other factors. The net result is that it's extremely difficult to come up with any kind of strategy to predict oil prices.
posted by burnmp3s at 12:45 PM on October 30, 2008
The best educated guesses for information in this vein can be found at the Energy Information Administration's website. That's where the data are that the better educated guessers uses.
My personal best educated guess: Assuming no major disruptions in supply, the down-turned economy will likely keep gas prices in the high $2.-- range until summer, where it will likely go up to the low-to-mid $3.--'s.
With the economy in the state that it's in, demand is likely to be lower than usual. Also, the market seems to have settled around $3/gal baseline price. And, with the global economy also struggling, the strength of the U.S. dollar relative to other currencies should actually do fairly well (by which I mean stay stagnant, as opposed to constantly dropping as it had been doing).
Of course, anything's possible. And, I know plenty of people that predicted the run-up to $140 (many thought even higher) as well as the collapse (there was no way the market was going to sustain prices that high in a bad economy). If the economy strengthens in the next year or so, you'll likely see some settling around $100/barrel, although that's very much conjecture.
posted by General Malaise at 1:18 PM on October 30, 2008
My personal best educated guess: Assuming no major disruptions in supply, the down-turned economy will likely keep gas prices in the high $2.-- range until summer, where it will likely go up to the low-to-mid $3.--'s.
With the economy in the state that it's in, demand is likely to be lower than usual. Also, the market seems to have settled around $3/gal baseline price. And, with the global economy also struggling, the strength of the U.S. dollar relative to other currencies should actually do fairly well (by which I mean stay stagnant, as opposed to constantly dropping as it had been doing).
Of course, anything's possible. And, I know plenty of people that predicted the run-up to $140 (many thought even higher) as well as the collapse (there was no way the market was going to sustain prices that high in a bad economy). If the economy strengthens in the next year or so, you'll likely see some settling around $100/barrel, although that's very much conjecture.
posted by General Malaise at 1:18 PM on October 30, 2008
Response by poster: Another theory I've heard is that Big Oil is keeping the pump prices down right now in order to minimize 4th quarter profits. I don't have enough smartitude to know all of the factors that would cause that to be the case, but it certainly feels like it might have some truth to it.
posted by modernpoverty at 1:20 PM on October 30, 2008
posted by modernpoverty at 1:20 PM on October 30, 2008
Sounds more like a conspiracy theory to me. I think the real problem with oil prediction is that insiders dont reveal whats going on. Even if you could access all the databases of OPEC, Citgo, Shell, etc you would still be hard pressed to make accurate predictions. If this was possible then you would probably be a millionaire by now advising governments and airlines about their oil policies.
Some markets really are unknowable and incredible hard to predict. There's no harm in accepting this as fact.
posted by damn dirty ape at 1:27 PM on October 30, 2008
Some markets really are unknowable and incredible hard to predict. There's no harm in accepting this as fact.
posted by damn dirty ape at 1:27 PM on October 30, 2008
There was a piece on NPR a few months ago that presented a statistical argument: whether you are looking three, six or twelve months ahead the best guess about the oil price then is the oil price now. It implies that that guesses about oil price over the past few months have been unreliable.
posted by jet_silver at 1:34 PM on October 30, 2008
posted by jet_silver at 1:34 PM on October 30, 2008
The best 'market' guess is basically the price of gasoline futures the time period you are interested in, plus a bit of retail mark-up. I can't find the quotes off-hand, but the information should be out there. Looking at the price of oil futures, plus the retail, plus the 'crack spread' (difference between a barrel of oil and the corresponding refined product) can also be useful.
While the market price isn't explicitly based on any formula, it incorporates the best guesses of people who have complex prediction models and careers staked on getting it right. As we have seen in the recent past, the market doesn't get everything right (not by a long-shot), but if anyone has better predictions, they could be making absurd money by buying/selling futures and thus helping correct the market price.
posted by bsdfish at 1:59 PM on October 30, 2008
While the market price isn't explicitly based on any formula, it incorporates the best guesses of people who have complex prediction models and careers staked on getting it right. As we have seen in the recent past, the market doesn't get everything right (not by a long-shot), but if anyone has better predictions, they could be making absurd money by buying/selling futures and thus helping correct the market price.
posted by bsdfish at 1:59 PM on October 30, 2008
As far as jet_silver's claim about the best guess for oil price in the future is the oil price now -- that's largely correct, but there are some complications. For example, short-term disturbances (like temporary supply or refining difficulties) will temporarily boost the price of gas.
In general, if people expected gas to be more expensive in the future, they could buy extra now and horde (well, gas goes bad, but there are ways of physically storing it). However, if they expected it to be less expensive in a year they couldn't *not* buy gas they needed to heat the home this winter.
So in general, as far as prices in the future, there is a bit of an asymmetry between the present and the future price. Look up backwardation and contango for more details.
posted by bsdfish at 2:03 PM on October 30, 2008
In general, if people expected gas to be more expensive in the future, they could buy extra now and horde (well, gas goes bad, but there are ways of physically storing it). However, if they expected it to be less expensive in a year they couldn't *not* buy gas they needed to heat the home this winter.
So in general, as far as prices in the future, there is a bit of an asymmetry between the present and the future price. Look up backwardation and contango for more details.
posted by bsdfish at 2:03 PM on October 30, 2008
Somewhere between $2.00 and $4.50 a gallon.
We've already seen the demand destruction and non-exporter-country political turmoil that occurred when oil got to the $120s and above for sustained periods -- the crude prices that drive $4.50 or so a gallon in much of the U.S. No one can confidently say there's a ceiling, but there's certainly plenty of resistance there that would be hard to overcome in 2009 given recessionary conditions.
On low end, crude would have to get to the $30s to have much of a chance of prices for to get gas under $2.00 a gallon in the U.S. Doesn't seem likely so soon. The exporters would work their way through a full cycle of production cuts, cheating, and capitulation first. A huge surge in pent-up demand from growth-hungry China and India and SUV-loving America would have to overcome as well. Another thing people need to factor in is that the $140s to $60s decline we've just seen was heavily influenced by the credit crunch, and specifically by forced selling from energy-heavy hedge funds. That unwind may be close to complete. (Although who knows for sure.)
In the long run, gas in the $1.00-$1.99 range in the U.S. is entirely possible. Lots of capacity is being brought on line now that will have a marginal operating cost that can support oil in the $30s, although the debt taken on to build the projects may well default. Add to that high MPG requirements and high carbon taxes (which the US rejects) and you could get a high measure of demand reduction as well. Of course, to get the cheap pump price the U.S. would have to accept the MPG requirements while rejecting the carbon tax. Accepting the carbon tax results in a high pump price divided more evenly between D.C. and Dubai.
posted by MattD at 3:40 PM on October 30, 2008
We've already seen the demand destruction and non-exporter-country political turmoil that occurred when oil got to the $120s and above for sustained periods -- the crude prices that drive $4.50 or so a gallon in much of the U.S. No one can confidently say there's a ceiling, but there's certainly plenty of resistance there that would be hard to overcome in 2009 given recessionary conditions.
On low end, crude would have to get to the $30s to have much of a chance of prices for to get gas under $2.00 a gallon in the U.S. Doesn't seem likely so soon. The exporters would work their way through a full cycle of production cuts, cheating, and capitulation first. A huge surge in pent-up demand from growth-hungry China and India and SUV-loving America would have to overcome as well. Another thing people need to factor in is that the $140s to $60s decline we've just seen was heavily influenced by the credit crunch, and specifically by forced selling from energy-heavy hedge funds. That unwind may be close to complete. (Although who knows for sure.)
In the long run, gas in the $1.00-$1.99 range in the U.S. is entirely possible. Lots of capacity is being brought on line now that will have a marginal operating cost that can support oil in the $30s, although the debt taken on to build the projects may well default. Add to that high MPG requirements and high carbon taxes (which the US rejects) and you could get a high measure of demand reduction as well. Of course, to get the cheap pump price the U.S. would have to accept the MPG requirements while rejecting the carbon tax. Accepting the carbon tax results in a high pump price divided more evenly between D.C. and Dubai.
posted by MattD at 3:40 PM on October 30, 2008
The price of gas typically goes up in May-June, goes down in Sept-Oct.
The recent collapse in oil prices is due to a sudden drop in demand from reduced economic activity, resulting in increased inventories. I.e., supply and demand. Keep an eye on supply (how much are OPEC nations actually reducing their production) and demand (GDP, mainly in the US and China).
posted by neuron at 5:01 PM on October 30, 2008
The recent collapse in oil prices is due to a sudden drop in demand from reduced economic activity, resulting in increased inventories. I.e., supply and demand. Keep an eye on supply (how much are OPEC nations actually reducing their production) and demand (GDP, mainly in the US and China).
posted by neuron at 5:01 PM on October 30, 2008
The clampdown on the world economy has forestalled $5 gas for some time by massively reducing demand for crude oil. Refining capacity will come online in the meantime, further forestalling higher prices even if crude prices regain strength. This will kill the nascent renewable energy business bubble, aghh, but will help stabilize inflation for a few years. Anyone who thinks they know the actual timing of all this is deluding themselves, and at least I know I am making a wild ass guess, which is at least based upon some information and knowledge of the energy industry.
posted by caddis at 6:56 PM on October 30, 2008
posted by caddis at 6:56 PM on October 30, 2008
Based on the last 40 years, somewhere between $1 and $4/gallon would be a pretty fair guess.
Not "the answer" but at least a reasonable starting point . . .
posted by flug at 8:05 PM on October 30, 2008
Not "the answer" but at least a reasonable starting point . . .
posted by flug at 8:05 PM on October 30, 2008
Another theory I've heard is that Big Oil is keeping the pump prices down right now in order to minimize 4th quarter profits.
Well, no, it doesn't work that way, and some basic understanding of supply and demand would show you. Big Oil is responsible to its shareholders, and if they aren't screaming for returns right now they must be sitting very pretty indeed. Big Oil (say, ExxonMobil) has every incentive to maximize profits (as ExxonMobil has just reported). The pump price is affected mainly by the barrel price, and oil is a commodity that if it's too expensive at X you basically just go to Y. The market is not perfect by any means but it's unlikely that anyone has the sheer cartel power right now you imagine. Conditions worldwide are considerably variable and this creates market elasticity. Obviously the folks selling oil at $140 would have preferred to keep it that way and many of them are not in any way concerned with US public opinion. As prices fall so will production, limiting supply to match lowered demand and attempting to maintain the higher prices.
Pump prices are substantially higher than raw petroleum prices because of many factors, but basically there are costs involved in refining and delivering the gas. Despite branding many gas stations are run independently. These people are typically squeezed to the bone and many have turned to convenience foods as a more stable profit center. Most delivery contracts are on a weekly basis and so there is much less elasticity available to the business. They can't drop the price because they already paid for the gasoline in their tanks, and they can't anticipate a drop because they need to pay in advance next week, too. There is more risk for them than for a futures trader who can get in and out of a position as fast he changes underwear.
If you want something long-term and official, there are things like this:
Short-Term Energy Outlook comes from the DOE. But it may already be out of date (Oct. 7). The number of private entities offering their own predictions is high. Read a market feed for a few days and you'll see some of them.
The simplest way to think about oil companies is as brokers who make money on the transaction. They're able to juggle aspects of the supply and influence the price, but it isn't the total price they are concerned with, it's the net. Under the right conditions they can maintain their net at very different price levels.
posted by dhartung at 11:06 PM on October 30, 2008
Well, no, it doesn't work that way, and some basic understanding of supply and demand would show you. Big Oil is responsible to its shareholders, and if they aren't screaming for returns right now they must be sitting very pretty indeed. Big Oil (say, ExxonMobil) has every incentive to maximize profits (as ExxonMobil has just reported). The pump price is affected mainly by the barrel price, and oil is a commodity that if it's too expensive at X you basically just go to Y. The market is not perfect by any means but it's unlikely that anyone has the sheer cartel power right now you imagine. Conditions worldwide are considerably variable and this creates market elasticity. Obviously the folks selling oil at $140 would have preferred to keep it that way and many of them are not in any way concerned with US public opinion. As prices fall so will production, limiting supply to match lowered demand and attempting to maintain the higher prices.
Pump prices are substantially higher than raw petroleum prices because of many factors, but basically there are costs involved in refining and delivering the gas. Despite branding many gas stations are run independently. These people are typically squeezed to the bone and many have turned to convenience foods as a more stable profit center. Most delivery contracts are on a weekly basis and so there is much less elasticity available to the business. They can't drop the price because they already paid for the gasoline in their tanks, and they can't anticipate a drop because they need to pay in advance next week, too. There is more risk for them than for a futures trader who can get in and out of a position as fast he changes underwear.
If you want something long-term and official, there are things like this:
Short-Term Energy Outlook comes from the DOE. But it may already be out of date (Oct. 7). The number of private entities offering their own predictions is high. Read a market feed for a few days and you'll see some of them.
The simplest way to think about oil companies is as brokers who make money on the transaction. They're able to juggle aspects of the supply and influence the price, but it isn't the total price they are concerned with, it's the net. Under the right conditions they can maintain their net at very different price levels.
posted by dhartung at 11:06 PM on October 30, 2008
This thread is closed to new comments.
The only thing that seems to be more or less certain is that OPEC isn't going to be able to cut its output to drive prices up unless the economy recovers. I really doubt it will be able to push prices more than a few points either direction by manipulating supply.
posted by valkyryn at 12:13 PM on October 30, 2008 [1 favorite]