Courtesy of Rigzone – Rigzone interviews Michele Marano on lower gas prices and housing prices.
by Matthew V. Veazey DownstreamToday Staff |
March 01, 2016 As this graph from the American Automobile Association (AAA) shows, the U.S. average price for a gallon of gasoline has fallen dramatically since the second half of 2014. As of February 8 of this year consumers were paying an average of $1.74 per gallon of gasoline, representing a 44-cent year-on-year decline, according to AAA. Barring any significant supply disruptions, AAA expects the low-price trend to continue for the near term. A limited victory? “Consumers are definitely the biggest winners when it comes to cheap gasoline,” said Alex Goldstein, founder and CEO of Chicago-based energy retailer Eligo Energy. “They are able to immediately see the difference of lower prices at the pump in their checkbooks and as a result will be more likely to use their savings in other areas of the economy. Industries such as manufacturing, agriculture and transportation also benefit from low fuel prices, said David Holt, president of the Consumer Energy Alliance (CEA), which counts representatives of those sectors among its membership. “Reducing the cost of energy for those sectors of the economy helps their bottom line,” he said. Noting that cheap fuel “absolutely” benefits the economy, Holt contends that two factors have nonetheless diminished its positive impact. First, a “convoluted, inconsistent” regulatory regime has made the U.S. energy market among the world’s least predictable, he said. “That unpredictability does trickle down” in the form of price complications in the energy market that affect other sectors of the economy, Holt explained. In addition, Holt pointed out the U.S. economy has sunk into a recession or is on the verge of doing so. “What you’re seeing now is a downturn in commodity sectors,” he said, adding that consumer demand is not as robust as it could be. Two gauges of consumers’ attitudes about the economy – one from The Conference Board and another from the University of Michigan – underscore Holt’s concerns about demand. “With reduced prices for consumers, theoretically every household gets, say, $2,000 more in their pockets every year,” Holt said. “You’d think that money’s getting spent, but with the high levels of unemployment and underemployment it’s not having the same economic effect as it has had in the past.” Further stifling consumer demand is a faltering upstream oil and gas sector, which for much of the past decade has stood out by exhibiting robust growth, added Holt. “Now that oil and gas is in a downturn, that’s probably contributing to the lower benefit (of cheaper energy) to the broader economy,” he said. “Low oil and gas prices do help consumers in the short term by reducing fuel and electricity bills and increasing the amount of disposable income,” added Uday Turaga, founder and CEO of Houston-based energy consulting firm ADI Analytics LLC. However, he pointed out that a prolonged low-price environment can hurt a number of major economic sectors. “Sustained periods of low oil and gas prices would … significantly curtail capital spending by oil and gas companies and thereby business for other economic sectors such as steel, industrial equipment, engineering and construction services,” he said. For instance, he said these industries are feeling the effects of reduced activities in shale plays in states such as North Dakota, Pennsylvania and Texas. Even refiners, who until recently reaped the benefits from cheap crude oil, are beginning to feel the pinch from low fuel prices. The inexpensive feedstock, coupled with solid demand, prompted refiners to process greater crude oil volumes. Increasing utilization demanded greater fuels storage, and inventories of |
gasoline and distillates are now unusually high. According to the U.S. Department of Energy’s Energy |
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Information Administration (EIA), U.S. gasoline stocks are well above 5-year norms and distillate stocks are at the top of the range for the period. As Bloomberg recently reported, U.S. refiners have begun to scale back fuels production to cope with the glut. For European refiners, a similar trend is playing out. Reversing their recent trend of strong earnings, refiners are expected to see more modest profitability in 2016. |
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“Although cheap gasoline prices are good for the consumer, the longer-term effects can be bad for the economy,” concluded Marano. “All property, whether commercial or residential, is affected by lower gasoline prices … and this does have an impact on construction of new buildings, retail centers, office space, etc. The upside to this is that with lower property values, this can be viewed as an investment opportunity for those who are able to buy and build now, or buy and hold for a sale or construction at a later time.” |