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OPINION | RICHARD MASON: Future prices of oil aren’t pretty

by Richard Mason | March 6, 2022 at 1:47 a.m.


Last week I filled my SUV with gasoline. The pump cost registered over $67. As an oil and gas exploration geologist, I know the price of gasoline is directly tied to the price of crude oil.

Crude oil and natural gas are commodities, just like a bale of cotton or pork bellies, and when the posted price of any commodity goes up, the price of whatever the end result of the commodity is, from a cotton shirt to a gallon of gasoline, goes up.

That's the way capitalism works: If the price of raw products increases, the price of the finished product increases. The worldwide price of crude oil determines the price of gasoline, and governments have very little to do with the price of crude oil.

It comes down to supply and demand. An over-supply of oil on the world market, for any reason, will cause the price of oil to drop, and a shortage of available oil will cause the price to increase.

Let's see where the price of gasoline and natural gas is headed. But first let's look back to President Jimmy Carter and the energy crisis.

The Saudis were upset with the United States for supporting Israel in the Six-Day War in 1967, and temporarily reduced the amount of oil they produced. That created a shortage in the worldwide crude oil supply, and sent the price for a barrel of oil from below $5 to over $20.

Oil industry folks in Texas, where I was working, cheered. "Conserve!" preached the president, who mandated 55 mph as the national speed limit. That didn't fly well in Texas--if you have ever driven in parts of south and west Texas at 55 mph, you know what I mean--but the oil and gas producers were elated, and it was boom time in the oil patch.

There was even a strange song called "Freeze a Yankee," and it went something like this: Drive 75 and freeze 'em alive/freeze a Yankee.

When the inevitable bust hit the oil patch in the late 1980s and crude oil dropped from the stratosphere of $125 to below $12 per barrel, hundreds of oil companies went bankrupt. But the oil industry has always been a series of booms and busts, and several years later the futures price of crude leveled out much higher.

Then covid-19 caused a drop in demand for oil and sent the price below $0. The futures price of crude oil dipped to minus-$34 per barrel: If you wanted to sell a barrel of oil on the futures market that day, you would have to pay someone $34 to take it off your hands. Several hundred thousand workers were laid off, and an estimated 1,000 companies went bankrupt.

I was traveling in west Texas during that time and saw a bumper sticker on a pickup that said, "Lord, give me one more boom, I promise not to p--- it away."

Today the oil and gas industry is recovering, and crude oil prices are in the plus-$90 per barrel range, which will put gasoline at around $3.50 per gallon, or $4.50 if you live in California. The price of natural gas during the pre-covid period bounced between $1.65 per million cubic feet of gas to around $2.

However, after covid hit and the rigs that drill for oil and natural gas shut down, both commodities soared in price. The drop in the natural gas supply sent the price to over $4.50/MCFG, which means your winter gas bill will probably double.

Let's see where most of the experts see the price of crude oil in the years ahead. One of the reasons the price of oil was stable prior to covid and the war in Ukraine was the increase in the supply of oil from new American wells.

However, covid greatly reduced the demand for oil, and the surplus production sent the price down and caused thousands of drilling rigs to be stacked, because drilling for oil and gas with those low prices is a money-losing proposition. While some rigs are starting back up, hundreds are still stacked.

The shutdown of rigs drilling for oil and gas has significantly reduced the amount of new oil available to the market. In 2020, the worldwide discovery of new oil and gas fields was the lowest since 1943. That means a lot less will be added to the worldwide market this year, which adds up to a tight oil market; as economic activity builds up, the oil supply may not be there.

Now let's translate that into the crude oil-gasoline market. As covid-19 subsides in 2022, economic activity will increase, and the demand for energy will quickly return to pre-virus levels.

That will increase worldwide demand for crude oil, which is now roughly from 95 million barrels to well over 100 million a day. If predicted increases in demand continue, the worldwide producers of those raw products will have to add at least another 10 million barrels of oil to the supply.

Experts say it will be difficult to add that much oil immediately. Saudi Arabia, the OPEC country that has been able to add oil to the market when necessary, may only be able to add 2 to 5 million barrels; when the U.S., Japan, and China add oil from their emergency reserves, the oil market may still be very tight. If other factors such as weather and terrorism shut down additional production, the worldwide crude oil market price will increase.

Before Russia--the second largest producer of oil in the world--decided to invade Ukraine, CNN, Goldman Sachs, J.P. Morgan all predicted oil at over $100 a barrel this year (some experts predict $125) and $150 in 2023. However, oil may skyrocket to $200 this year if Russian oil is taken off the world's supply because of sanctions from Western democracies.

That's why the pros say the future is, at a minimum, $5 per gallon gasoline. If a large portion of Russian oil is removed from the market, gasoline could easily reach $7 per gallon, just as your natural gas bill doubles or triples this winter.

There is some good news in $200/bbl oil and $7/gallon gasoline. The huge jump in oil and natural gas prices will accelerate the switch to electric cars, solar panels and other renewable energy sources.

In the meantime, hold on to your pocketbook, because if oil goes up to $200 per barrel, my SUV fill-up will cost $150.

Email Richard Mason at richard@gibraltarenergy.com.


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