U.S. consumers are currently paying the lowest prices for gasoline in about five years. Not only are U.S. consumers surprised by this development but so is the entire world oil sector.
The price of the world’s most watched and important single raw material declined 25% in four months. In June, world oil prices were hovering at $115 bbl. before dropping below $80 bbl. in November. Adjusted price forecasts are currently calling for even lower prices in the mid $70s.
How were oil price forecasts so far off and why have oil prices declined at such a sharp rate over a comparatively short time?
Several factors have contributed to the errors in oil price forecasts. First, the size and significance of increased U.S. oil production and its effect on world markets was not considered. Second, there have been major concerns over internal security and oil supply from the Mideast that have not occurred, and finally expected growth in oil demand outside of the U.S. has softened.
The recent dip in oil prices has shattered expectations of increasing world oil prices. Previous oil price forecasts called for stable to rising prices amid slow world production growth that would be outpaced by demand growth, particularly from emerging countries such as China. This situation has reversed with world oil production increasing, particularly in the U.S., and world oil demand slowing, particularly in developing nations.
But the effects of declining oil prices on the barge industry and the U.S. economy are positive. First, the projected range of price decreases will have little effect on current domestic exploration and production. Further significant oil price decreases appear remote and would have to be in the range of $20 bbl. to negatively affect U.S. exploration and production. Second, cheaper oil prices place competitive pressures on other energy sources such as natural gas and coal.
The barge industry stands to benefit directly from cheaper oil prices through lower costs for diesel. Sustained lower oil prices will be a win-win situation for everyone, particularly when it was totally unforeseen by the experts who live and breathe oil.
