Who doesn’t love low gasoline prices?
Travel is cheaper, plastic goods are less expensive, and it’s easier to transport products and run farm equipment. Many consumers are leveraging the money they save at the gas pump to increase personal spending on other goods and services, further propelling our economic recovery. The U.S. Energy Information Administration (EIA) believes that gasoline prices will remain low through 2015—averaging a whopping 91 cents less per gallon than in 2013.
The dollars and cents we pay each time we visit the pump actually reflect complex global politics. Since its formation in 1960, the Organization of Petroleum Exporting Countries (OPEC) has historically been very effective at manipulating the supply of oil—and its resulting cost—according to the organization’s interests. Given its majority share of total worldwide oil production, OPEC has often ensured its market control by increasing production to lower cost. Thanks to new extraction methods, however, the United States has replaced Saudi Arabia as the largest producer of oil in the world. With such a boom in U.S. oil production, OPEC can no longer independently control global supply and price.
In a bid to hedge its crumbling share of the market, OPEC has announced that it will not decrease short-term production. That’s the catch in our current low prices: they result from supply outpacing demand. And simultaneous to countries outside the control of OPEC increasing global supply, weak economies in Europe, Russia, and Japan have reduced global demand. This oil glut could drive the price of oil sufficiently low to stymie U.S. energy investment, as has happened many times in the last few decades.
Energy independence has been a U.S. goal since the 1970 oil embargo; however, each time we have made strides toward that goal, OPEC has successfully undermined our investment in domestic energy. For example, in the 1980s Saudi Arabia began to produce oil at full capacity to maintain its market share, and the price of oil plunged to less than $20 a barrel. With oil so cheap, U.S. organizations reduced their investment in domestic energy innovation and exploration in favor of low-priced foreign oil—a move that simply reestablished our enduring dependence on OPEC. Subsequently, OPEC decreased global oil supply, and prices returned to their original highs. Once again, in 2015, OPEC has strategically decided to keep oil supply elevated.
If the U.S. can continue investing in energy production innovations, we can outlast OPEC’s attempt to ultimately regain control over global oil supply. Unfortunately, this endeavor will strain domestic energy companies. Analysts estimate that the break-even point for U.S. energy companies is anywhere from $45 to $80 per barrel of oil. The EIA’s 2015 estimate of $68 per barrel sits squarely within those estimates, putting U.S. energy companies in jeopardy of experiencing losses in times of much-needed research and development investment. And in the absence of profit, the incentive and capacity to continue investing in domestic energy innovations begins to diminish.
Although energy companies may lose money in the short term by maintaining full production, they could realize meaningful return if the U.S. is able to ultimately achieve true energy self-sufficiency. Not only would energy independence positively impact U.S. energy company profits, but it would provide far-reaching macro-economic benefits—improving domestic jobs and economic growth. Most importantly, but more nuanced, if we can outlast OPEC in this bid for market control, the U.S. could move forward with a less entangled foreign policy, geared toward less conflict and loss of life. So while we enjoy low prices at the pump, we must maintain our collective hope that domestic energy companies will continue their investment in energy innovations and exploration.