Drivers always like lower gas prices. But although prices at the pump have been dropping, that may not last. Oil prices are unlikely to fall much lower.
Of course, we have many factors affecting the price of gas — the most important being the price of oil.
Oil traders usually follow the antics of OPEC+. Major oil producers set quotas and try to control the price. And usually, someone cheats.
Cheaters create some volatility in oil prices. But the producers are often at the mercy of demand. Because no matter how much they cut output, if demand drops, then oil prices fall.
For now, demand is likely to be driven by the United States.
While electric vehicles may be lowering demand, and while consumer wariness about the economy may reduce driving — none of that matters.
The U.S. demand for oil is still likely to increase, which will prevent oil prices from falling. And contributing to that demand is the Strategic Petroleum Reserve (SPR)…
Refilling the Strategic Petroleum Reserve
In 2021, the U.S. government started drawing down the SPR, which dates back to the oil crisis in the 1970s. At that time, OPEC shut down the supply of oil to the U.S. and other Western countries. The country’s leaders at the time realized it would be a good idea to stockpile oil in case that happens again.
They understood oil was a strategic necessity. Armies run on oil. So do a nation’s Navy and Air Force. If OPEC could stop the flow of oil, it could bring an end to military operations … at least in theory.
To counter that risk, oil was stored in the SPR. This is a complex of four sites with deep underground storage caverns created in salt domes along the Texas and Louisiana Gulf Coasts.
The reserve can hold 714 million barrels. It currently holds about 350 million barrels, about 45% less than it held in 2021.
The government has been buying oil in recent months to refill the reserve. In October, the Department of Energy bought 6 million barrels. Additional monthly purchases are planned through at least May 2024.
This is a significant amount of demand when production and consumption are relatively balanced. According to the Energy Information Administration, demand is expected to average 102.44 million barrels per day next year. Production is forecast to be 102.55 million barrels.
That’s a small amount of excess supply in the world, about 0.11 million barrels a day. The SPR is trying to buy an average of 0.2 million barrels per day.
Economics 101 tells us that when demand exceeds supply, prices rise. The U.S. has some flexibility on refilling the reserve, but with multiple crises in the world, delays carry risk.
So it’s likely the U.S. will keep pressure on oil prices … and that means we are likely to witness higher gas prices.
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Editor, Precision Profits