Projected Gas Prices for 2016

Gas prices hit an average of $4 per gallon at the pump in the United States in March 2014 and then bottomed to an average price of $2.46 per gallon in October 2015. The U.S. Energy Information Administration ( EIA) is responsible for collecting and analyzing energy statistics and operates independently from policymakers; its goal is to disseminate information to the public. The EIA forecast estimates 2016 gas prices will be lower on average than what was seen in 2015, with a predicted price per gallon in 2016 of $2.38.

This follows record-high crude oil production in Texas since 1972 in 2014 and 2015 from the use of hydraulic fracturing (fracking), which has made oil drilling ventures more efficient. Oil production in the state is responsible for up to 35% of the nation’s supply of crude oil. In April 2015, U.S. output of oil was at its highest with production of 9.6 million barrels per day. The EIA’s forecast of lower gas prices is in line with predicative information released by The World Bank and contrasts with OPEC, banks on Wall Street and the CEO of Hess, all of whom forecast higher prices in 2016.

The increase in the low gas prices seen in October 2015 is due to a $5/barrel increase in the price of North Sea Brent crude oil from 2015 to 2016, combined with lower rates of oil production from drilling ventures within the U.S. From August 2015 to September 2015, domestic production of oil fell by 120,000 barrels per day. Oil production is expected to decrease until June 2016, increasing again in September to November 2016, with a total production of 3.25 billion barrels of oil in 2016 as compared to estimated production in 2015 of 3.36 billion barrels.

The U.S. is not the only country to produce at high levels; Saudi Arabia and Russia have also experienced high production levels, and Iran is expected to re-enter the crude oil market when sanctions against the country are lifted.

The World Bank offered a forecast that 2016 oil would fall 4% from an average price per barrel of $49.70 to $47.70 based on Brent, Dubai and West Texas Indicators for crude oil. After 2016, The World Bank expects crude oil prices to steadily increase with a projection of $56.90 in 2020 and

$70.80 in 2025 in terms of real U.S. dollars rather than nominal dollars.

The price of gas is affected by more than just the production rates of international and domestic oil fields. When it comes to the price seen at the pump, the concentration of gas stations within a geographic area, state gas taxes and ease of access to gas supply sources can all factor in. Environmental programs enforced in certain parts of the U.S. that aim to reduce the pollution caused by burning gasoline increase price, as reformulated gas makes for costlier production and distribution. It is for these reasons that residents in California, where gas taxes are the highest, experience the highest prices in the nation at $2.91 per gallon as reported in October 2015, while states such as New Jersey report prices under $2. The price of gas is also likely to be lower in the summer months when homes are not burning natural gas.

Departing from the EIA’s forecast of lower overall prices in 2016, OPEC representatives expect a rise in 2016 gas prices due to high demand for U.S. crude oil foreign exports. Falling domestic production of crude oil in combination with demand for the same resources outside of the U.S. drives up prices as a result. OPEC members are responsible for about 40% of the world’s crude oil, and, therefore, wield significant power in the oil market. OPEC consists of 12 member countries, including Iran and Saudi Arabia. The organization coordinates its production of crude oil as a means of controlling oil and gas prices.

John Hess, the CEO of Hess Corporation, cites a rise in gas prices due to continuing high demand in conjunction with low prices and falling production. Hess also claims that lower rates of investment into the production and exploration of oil mining experienced in 2015 will further reduce production in 2016. Hess expects demand for crude oil to be set at 1.2 billion barrels a day worldwide and this, in combination with the production of non-OPEC countries falling by 500,000 barrels a day, will cause the price of gas to rise as a result.

A survey conducted by The Wall Street Journal on the opinions of 13 investment banks including Barclays, UBS Group and JPMorgan Chase also predicted higher gas prices for 2016, with an expected price of $58 per barrel. Previously, the banks had issued a prediction of rates as high as $70 per barrel, but lower rates of population growth in China than previously expected signified lower demand for oil. Growth in China for the third quarter of 2015 hit 6.9%, the lowest figure in six years.

Attempts at optimizing the efficiency of each barrel produced seem to have reached their limit. With domestic production of oil hovering below $50 a barrel at its cheapest, improvements in drilling technology in the form of fracking and attempts by drilling companies to manage budgets through cutting employees and reducing costs incurred by large projects have pushed down the average price per barrel. Further cost-cutting on behalf of drilling companies does not appear to be feasible at this time to maintain production levels unless drilling companies can make significant changes to their overhead costs.

The climate of high production in combination with low costs has amounted to sweeping losses for oil producers such as Royal Dutch Shell, which lost $6.1 billion, and ConocoPhillips, which lost $1.1 billion in the third quarter of 2015. In Italy, Eni SpA announced third quarter losses of €952M.

Consumers at the gas pumps are not the only ones benefiting from the low gas prices; airlines, rail companies and sea transporters have something to gain from low crude oil prices. On the other hand, oil executives and hedge funds that specialize in oil debts have much to gain if crude oil prices rocket to the rates seen in 2008.