Have falling gas prices ‘overshot their target?’
Former EPA administrator weighs in

By Matt Masterson - Freeman Staff

Dec. 16, 2014

WAUKESHA - The price of oil has fallen by nearly 50 percent in the last six months, a surprisingly steep drop that’s left consumers cheering but has economists questioning whether this decline is actually good or bad.

J. Winston Porter, a former assistant administrator for the Environmental Protection Agency, believes that although prices are down now, that may not be the case for the long haul.

“I am not a big economist, but my feeling is it has overshot the target,” he said. “It may go down further, but it is going to be really interesting if it does stay anywhere near this.”

The environmental and management consultant told The Freeman Russian oil producers need to make approximately $100 per barrel just to break even, but prices are now at just $60 per barrel. He believes prices will rebound, but he is unsure of when or by how much.

What is also unclear is just why prices have dropped so fast, so quickly without a single, determining cause.

Since 2008 oil companies in the U.S., for example, have increased production by 70 percent, or 3.5 million barrels of oil per day. To put that in perspective, that increase alone is more than the production of any Organization of the Petroleum Exporting Countries member, other than Saudi Arabia.

The national average gasoline price has fallen for 81 straight days to $2.55 a gallon - its lowest level since October 2009, according to AAA. It’s $1.15 a gallon cheaper than its high for the year, saving U.S. households $100 a month

As U.S. production was ramping up, turmoil in the Middle East and North Africa reduced supplies from Libya, Iran and elsewhere. A balance was struck: Increasing supplies from outside OPEC and from Iraq’s recovering oil industry helped meet rising demand around the world as other OPEC supplies wavered.
 

Impact of fracking

Another reason could be an increase in hydraulic fracturing - or fracking - in which large quantities of water are pumped into rock in the earth’s surface to create holes through which natural gas and oil can be extracted.

“I think there is a certain amount of momentum in this as (oil prices) start dropping,” Porter said, “but I think the big thing you put your hands on is that hydraulic fracturing has lowered the price of oil and gas tremendously.”

Oil can now be collected through fracking far more cheaply than traditional drilling, according to Porter. In just the last three years, fracturing has been increasingly used to root out oil, particularly in places like North Dakota - which has gone from being the 10th largest producer of oil in the U.S. to the 2nd.

The fluids put into the ground are made up of 90 percent water, approximately 9 percent sand - which is used to hold the fissures open - and then about half a percent or so of “chemicals.”

Those “chemicals” have been at the center of the debate around fracking. Porter said they are largely detergents and other household substances, but he added that if you don’t disclose what is in something, people can get nervous, and some companies and states have not disseminated that information.

He said companies want to protect their trade secrets that they may have spent millions on to develop.
 

Falling prices, failing economy?

Falling fuel prices act like a tax cut and help boost consumer spending, which in turn accounts for 70 percent of the U.S. economy. But economists are growing concerned that there may be other, more troublesome forces at play. The depth of oil’s plunge could be a signal that the global economy is struggling even more than economists think. A weak global economy could hurt the U.S. economy by reducing exports, employment and spending, which together could outweigh the economic benefits of cheaper fuel.

Porter said in the future, the United States’ newly-found wealth of oil and natural gas could be sold to countries who need it in places like Eastern Europe, where they are held at the behest of the controlling energy power in the region - the Russians.

“Russia has a huge bind on Eastern Europe because they control the gas,” he said. “So they can tell the Ukraine, we are going to double the price of gas, or you just don’t need it.

“If we could export some of our extra natural gas to Europe - and they want it badly - then the Russians certainly have some competition. This is several years down the road, but it is on the horizon.”

Contributing: The Associated Press

Email: mmasterson@conleynet.com