Gas Is Suddenly Cheap(er), and the Reason Is Bigger Than You Think

Gas prices have fallen below $3 per gallon in much of the US, and the explanation isn’t the simple seasonal differences that always make gas cheaper in autumn. The bigger reason: US oil shale deposits are turning the global oil market on its head.

Photo by Wil C. Fry on Flickr.

Photo by Wil C. Fry on Flickr.

How did cheap gas happen?

In the simplest terms, supply is up and demand is down.

Travel drops between the summer travel season and the holidays, and cooler fall temperatures actually make gas cheaper to produce. That’s why gas prices always fall in autumn.

But that’s not enough to explain this autumn’s decline, since gas hasn’t dropped this low in years. China is also using less gas than expected, but that’s also only part of the explanation.

The bigger explanation seems to be that supply is also up, in a huge way. North American oil shale is hitting the market like never before, and it’s totally unbalancing the global oil market. Oil shale has become so cheap, and North American shale producers are making such a dent in traditional crude, that some prognosticators are proclaiming that “OPEC is over.”

It’s that serious a shift in the market.

Will this last?

Yes and no.

The annual fall price drop will end by Thanksgiving, just like it always does. Next summer, prices will rise just like they always do. Those dynamics haven’t changed at all.

Likewise, gasoline demand in China and the rest of the developing world will certainly continue to grow. Whether it outpaces or under-performs predictions matters less in the long term than the fact that it will keep rising. That hasn’t changed either.

But the supply issue has definitely changed. Oil shale is here to stay, at least for a while. Oil shale production might keep rising or it might stabilize, but either way OPEC crude is no longer the only game in town.

Of course, oil shale herf=”http://www.businessweek.com/articles/2013-10-10/u-dot-s-dot-shale-oil-boom-may-not-last-as-fracking-wells-lack-staying-power”>isn’t limitless. Eventually shale will hit peak production just like crude did. When that happens it will inevitably become more expensive as we use up the easy to refine reserves and have to fall back on more expensive sources. That’s a mathematical certainty. But it’s not going to happen tomorrow. In the meantime, oil shale isn’t very scarce.

So the bottom line is that demand will go back up in a matter of weeks, and the supply will probably stabilize, but at higher levels than before.

What does this mean?

Here’s what it doesn’t mean: There’s never going to be another 1990s bonanza of $1/gallon fill-ups. Gas will be cheaper than it was in 2013, but the 20th Century gravy train of truly cheap oil is over.

Oil shale costs more to extract and refine than crude oil. Prices have to be high simply to make refining oil shale worth the cost, which is why we’ve only recently started refining it at large scales. Shale wouldn’t be profitable if prices dropped to 1990s levels. In that sense, oil shale is sort of like HOT lanes on a congested highway, which only provide benefits if the main road remains congested.

So shale can only take gas prices down to a little below current levels. And eventually increased demand will inevitably overwhelm the new supply. How long that will take is anybody’s guess.

In the ultimate long term, oil shale doesn’t change most of the big questions surrounding sustainable energy. Prices are still going to rise, except for occasional blips. We still need better sustainable alternatives. Fossil fuels are still wreaking environmental catastrophe, and the fracking process that’s necessary to produce oil shale is particularly bad. It would be foolish in the extreme for our civilization to abandon the progress we’ve made on those fronts, and go back to the SUV culture of the 20th Century.

There will probably be lasting effects on OPEC economies. The geopolitical situation could become more interesting.

In the meantime, enjoy the windfall.

By | 2016-12-27T20:06:52+00:00 October 28, 2014|Categories: Motor Vehicles, Sustainability, Transportation|Tags: |9 Comments

9 Comments

  1. Joshua Hicks October 29, 2014 at 8:19 am

    I believe this article is talking about Shale Oil and not Oil Shale. There is a big difference. Shale Oil is a liquid produced from standard shale formations such as the Niobrara and Bakken. Oil Shale is a solid, and is very expensive to produce, as it needs to be heated before it produces oil. There are vast deposits of Oil Shale in Colorado, Utah and Wyoming (Green River Formation), that are only viable if oil is in the $150 per barrel range.

    Read more about the difference here:
    http://www.theenergyreport.com/pub/na/the-difference-between-oil-shale-and-shale-oil

    • TakeFive October 30, 2014 at 9:48 pm

      Joshua… You are correct and Oil Shale is still a pipe dream.

      Dan is speaking of all the crude oil being produced from fracking in shale rock deposits which releases the crude that’s otherwise trapped. The addition of horizontal drilling has also added to the ability to recover oil from the different (shale) rock layers.

  2. Dan October 29, 2014 at 9:34 am

    Great article! There’s a hyperlink issue in the fifth paragraph of the “will it last” section.

  3. CR October 29, 2014 at 11:26 am

    I agree in general with the argument, but you exaggerate the impacts of fracturing a bit. US GHG emissions have gone down for the first time due to high natural gas production, entirely enabled by fracturing and horizontal drilling. Water disposal is actually what creates many of the problems associated with fracturing (induced seismicity, water pollution), and the Gasland-style problems like burning tapwater actually come from biogenic contamination, not fracturing (usually the result of abandoned wells from decades ago).

    In any case, natural gas makes a relatively good transitional fuel to move away from coal, the mining and combustion of which is far worse than oil and gas production. I’m absolutely in favor of moving away from fossil fuels entirely, but we need to keep a science-based approach to evaluating these things. Scientifically speaking, fracturing isn’t a clean technology by any stretch, but many of the claimed effects are either exaggerated or inaccurate. Better a fractured well than a coal mine. As with every environmental concern, there is no perfect solution, so we have to choose the lesser evil as we develop the renewable technology and infrastructure that can wean us off of fossil fuels entirely.

    • TakeFive October 30, 2014 at 10:07 pm

      CR… Very well said. Part of the mystery with fracking fluids is that they are not all the same and they’re “proprietary.” Seems though the best is proving to be merely sand and water and/or ceramic propants.

      Sadly in Eastern Europe (including Germany) they are going back to coal and they burn that awful lignite coal. Renewable energy needs backup and they’re not enough by themselves. Coal has become very cheap of late; therefor…. The good news is that the new coal burners are much more efficient and cleaner than the old ones of which there are still far too many.

    • Nathanael December 3, 2014 at 7:57 pm

      Actually, the burning tapwater does come from fracking. Typically due to infiltration of methane through newly fractured rocks into the water supply for the wells. This is due to sloppiness, really, but unfortunately most of the frackers are sloppy.

      And US GHG emissions have almost certainly gone up due to fracking, due to a large increase in methane escaping from underground into the air — which wasn’t being measured. 🙁 Beware, *measured* emissions can go down while emissions go up, if you fail to measure something. Again, sloppy drilling practices…

      Of course, now that it’s December, the Saudis have decided to drive the frackers completely out of the oil market by releasing the cheap Saudi oil… so it may all become irrelevant…

      Meanwhile, the renewable technology is all developed. (I’m driving a Tesla, myself. My neighbors’ house is solar-powered. Etc.) The infrastructure just awaits construction money, basically.

  4. Wendy R October 29, 2014 at 12:57 pm

    Hi Dan,
    Thanks for writing this editorial on gasoline prices. I’m a long time reader of Denver Urbanism/Infill, steeped in Denver Bicycle culture, very active in multi-modal transportation advocacy, and I work in the oil and gas industry. I’d love to sit down with you and talk about the hydrolic fracturing process because I want our social leaders to have more information to work with than just wikipedia. Fracfocus.org is a great, science driven website that “was created to provide the public access to reported chemicals used for hydraulic fracturing within their area. To help users put this information into perspective, the site also provides objective information on hydraulic fracturing, the chemicals used, the purposes they serve and the means by which groundwater is protected.” I hope you and your other readers will take a look at FracFocus(and since Urbanism has to approve my comment, you should have my email address, please get in touch). Thanks!

  5. TakeFive October 30, 2014 at 10:20 pm

    Dennis Gartman has made some pretty wild statements about the future of crude oil. http://www.cnbc.com/id/102125295

  6. Ted October 31, 2014 at 10:27 am

    Interesting, the reports I have heard haven’t talked as much about the effects of oil shale, but I don’t doubt it at all.

    There is an interesting political piece to this story though which you left out, and that is that the Saudi’s have not cut back production of crude oil at all. NPR has run some pretty interesting stories about this in the past few days. Typically Saudi Arabia moderates its oil production in an attempt to keep global prices stable. This allows them to not only profit off their vast oil reserves, but also use them to wield influence on global politics. Recently, as alternate energy sources and American produced oil have been on the rise, they have not decreased production as they usually would and are not saying why. Theories why they may be doing this range from an attempt to deprive Russia and Iran of oil revenue over their support for Assad, to an economic attempt to handicap new sources of energy like Canadian tar sands, and every explanation in between.

    I personally think both reasons make sense. Shale, as you say, is only feasible when global energy prices are sky-high. By flooding the market with cheap crude, the Saudis can screw with the short-term viability of more expensive extraction methods in competing countries. The Russia/Iran explanation makes sense too when you consider that the Saudis cooperated with the US in the 1980s to flood the market with cheap oil as part of the mulch-pronged economic attack on the USSR. S.A.’s interests in regional politics may be important enough to them to try this tactic again.

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