Oil-Patch Native Tells What’s Behind Low Pump Prices

There’s a lot of talk about oil economics and how low prices at the fuel pumps will affect the mix of vehicles sold. 

It seems apparent that small vehicles will need heavy incentives to keep the assembly lines running and to minimize CAFE fines. This will reduce residual values on those vehicles. 

As someone who was raised in the oil patch to an oil-company family, I have watched as OPEC at times would curtail its collective production to maintain price equilibrium. 

In fact, it produces about the same amount of oil today as it did 40 years ago when the world population was smaller and fuel consumption was much less than today.

However, OPEC has on occasion allowed the global market price of oil drop to drive out competitors. It is the low-cost producer. It can afford to be. Primary OPEC member Saudi Arabia is sitting on about $700 billion in dollar reserves.

I distinctly recall the oil glut of the mid-1980s.  The economies in oil-patch states took major hits. There were lots of layoffs at domestic oil companies during that era.

We’re seeing something like that again. Recently, Schlumberger announced a layoff of 9,000 workers. With oil’s world-market below the cost of production, where would the Keystone pipeline get the traffic it needs to pay its debt service? 

It is hardly a surprise when a cartel like OPEC acts like a cartel.  Frackers, sand and shale producers, ethanol producers, EV car manufacturers and battery makers will take a hit. 

The issue in the U.S. has never been our dependence on foreign oil. The issue is our dependence on the global-market price of oil as controlled, or at least heavily influenced, by OPEC. Does anyone think an American oil company would sell its oil to American consumers for less than the global market price? 

Oil is a fungible commodity. It makes little difference from a price standpoint if the vehicle fuel we use comes from a foreign country or Texas.

Yes, it is always nice to keep money at home, and with all things being equal, the transportation advantages means a lot of domestic oil stays home. But that doesn’t have a major bearing on the price.

Saudi Arabia finds itself in an interesting position. The Sunni Saudis aren’t that fond of their Shiite Iranian OPEC partners. The Saudis can be seen cooperating with the U.S. government in its sanctions against Iran for its nuclear program as well as for its financial support of regional terrorist groups. 

The Saudis can be seen as supporting the Administration in its desire to curtail the oil revenue of ISIS. They can be seen as cooperating with the sanctions on Russia over its Ukrainian incursion. And the low price of oil doesn’t help Venezuela, a oil-producing nation the U.S. considers hostile.   

Low fuel prices will give the U.S. economy a shot in the arm. That could carry through to the next election cycle. The European Union may avoid another recession, which also helps the U.S.

So there are lots of benefits to cheap oil in general. 

At the same time, the Saudis are accomplishing what they wanted to accomplish all along: force higher-cost producers to fall by the wayside. As production wanes, the global-market price will rise.

But for now, the Administration will have to bite its tongue as alternative-fuel initiatives become less compelling. There will be less conservation. Ambitious CAFE fuel-economy mandates may need revisiting. 

My best guess is we will see moderate oil prices for the next two years or longer. That’s barring anything unforeseen. And when it comes to predicting oil prices, unforeseen circumstances always are possible.

David Ruggles is an automotive consultant and former dealership general manager. He can be reached at [email protected].