Oil prices have more excuses than a meth addict. Demand in China, oil refinery fires or in maintenance, OPEC restricting supply, Saudi Arabia flooding the market, etc. Reality in oil pricing is elusive; however, despite what some experts say, next year will likely see the price at the pump jump based on current factors and on politics.
Minor Influence: Supply and Demand
We have always been told that supply and demand rules the capitalistic market. Most people mistakenly assume that free market means the market can’t be manipulated, but a free market is ripe for manipulation, especially for the unethical business person.
A prime example of market manipulator is Saudi Arabia. Big oil producers are constantly seeking a bigger piece of the oil market, and fracking in the United States has revitalized US oil production. The Saudi response has been to flood the market with oil to bring down the price/barrel, leaving US producers with increased expenses and less revenue.
Despite temporary manipulations of the oil supply, the ratio of world supply and demand has not significantly changed in recent history. Demand has steadily increased (See Graphic 1.0,) and supply has increased just slightly less than demand. In fact, the supply of oil carefully follows demand so perfectly that it seems unnatural. It’s almost as if oil companies knew that an over supply would force oil prices down and oil shortages would lead to high gas prices, which would stimulate the development of alternative fuels.
There is no obvious correlation when comparing the wild deviations in crude oil price (See Graphic 2.0) to the world supply and demand (See Graphic 1.0.) This raises the question: If supply and demand doesn’t control the price of oil in the United States, what does?
The Game of Oil Pricing
World oil demand has been on the increase, but not in the United States and Western Europe (See Graphic 3.0.) The Recession of 2008, pushed demand down in the United States and Western Europe, but as the world economy collapsed, the price of crude oil rocketed up, then dropped dramatically for six months, then returned to its pre-recession price and resumed a steep climb for the next five years. The price of crude oil didn’t coincide with pre-recession, recession, or post recession demand.
Interestingly, retail gas prices (See Graphic 4.0) make even less sense than crude oil prices, as the price at the pump spiked while crude oil prices dropped. This deviation between crude oil prices and retail gas prices would be repeated, in 2012. The common denominator? The Presidential election.
Some experts are saying oil prices will remain low in 2016. The problem with these predictions are that the demand for oil is increasing, Republicans are self-destructing, and the economy is in good shape. Low prices at the pump in 2016, would be death to Republicans, and that is not what conservatives in the oil industry do in an election year.
Since 1980, oil pricing just prior to Presidential elections in the United States follows an interesting pattern. According to the Energy Information Administration (eia.gov) the average retail regular unleaded price has a strong correlation to the imported crude oil prices; however, during the last two Presidential election years, the October retail price jumped dramatically, while crude oil prices fell (See Graphic 4.0.) The rare deviation in the price of retail regular unleaded gasoline just before an election again indicates that the market was influenced by political, not free-market, forces.
As 2016, is another election year, and as the Republican party is in deep trouble, the conservative leadership in the oil industry will likely follow the past pattern of attempting to create an economic crisis through manipulation of retail oil prices. Based on the Presidential election years since 1980, the average at-the-pump price of regular unleaded (See Graphic 5.0) will be about $270/barrel or around $4.91/gal.
(NOTE: Personally, it’s hard to believe we could see $4.91/gallon next October. Despite what the trendlines suggest, I would expect the price to be closer to an average of $4.50/gallon. However, I’m confident that the average price of regular unleaded gas will be over $4.25/gallon.)