Peak Oil Pukes

Remember when energy analysts were scaring everyone with the concept of “Peak Oil”? The theory was that global oil production had peaked and as a result, prices would shoot up to $200 a barrel and the cost at the pump would top $10 per gallon.

Flash forward to last week, when West Texas Intermediate (WTI) and North Sea Brent Crude touched new four-year lows. (The Energy Information Agency provides a good description of the two benchmarks here.) The combination of the U.S. shale boom and weakening Chinese, European and Japanese demand has pushed down oil prices 30 percent since June. And according to the International Energy Association, lower prices are likely to continue into the first half of next year. Short of a geopolitical flare up, the IEA believe the we are entering “a new chapter in the history of the oil markets.”

The Energy Information Agency said that US oil production reached 8.9 million barrels per day in October, the highest monthly production since July 1986. The agency is forecasting that production will average 9.4 million barrels per day next year, which would be the most since 1972. As a result, the government cut its forecast for global oil prices next year by $18 a barrel to $83. The EIA notes that a $1-per-barrel change in the price of crude oil translates into a change of about 2.4 cents per gallon of gasoline (There are 42 gallons in one barrel, and 2.4 cents is about 1/42 of $1) and so the agency also predicts that the average price of gas will be below $2.94 a gallon next year, a 44-cent drop from an outlook issued a month ago. (Currently, the price of a gallon of gas has dropped to $2.88, a 26-cent drop from a month ago, according to AAA.)

If that holds, consumers will save $61 billion on gas compared with this year. That may not seem like a lot in the context of a $17.5 trillion U.S. economy, but economists say it matters because it immediately gives consumers more money to spend on other things…like holiday shopping!

Before we get too ahead of ourselves with visions of sugar plum fairies and the like, you may wonder if there is a downside to the drop in oil. A recent Sanford C. Bernstein report noted that oil at $80 a barrel makes one-third of U.S. shale oil production uneconomical. If that’s the case, there is a fear that state economies like Texas and North Dakota which combined, account for about half of the nation’s oil production, could take a hit to their energy-dependent economies.

But any pullback on the local level is likely to be outweighed by a more general increase in economic growth. Estimates range from a 0.3 to 0.5 percent bump in fourth quarter GDP from lower oil and gas prices. That might not seem like a lot, but it sure would come in handy for the holidays and kick US growth into a higher gear.

For more, go to JillonMoney.com

Image by Flickr User nate2b