pinion How Long Can the Cheap Gas Last?

I have to admit that despite following this particular market and its dynamics quite closely, I never thought that I'd again fill my tank at $1.72 per gallon, like I did at Thornton's on SR 64 West this week. The story of how that came to be and whether it can last is an interesting one.

In simple terms, there's a glutted world market in which even historically considerable demand cannot match a once unthinkable supply. Prices, which hit $140+ per barrel last decade, prompted oil companies to invest heavily in new technologies and exploration, while making known reserves that were not economically feasible at lower prices suddenly worthwhile.

At the time, OPEC predicted per barrel prices would hit $170, while Goldman Sachs thought they could see $200. The thing about oil is that you can't be as reactive to markets as most products are. It takes a lot of time to significantly increase supply and once you do, it immediately begins to pull it back into balance. So how did oil producers overshoot the mark by so much?

Let's start with the domestic boom. Improvements in shale fracking technologies helped the U.S. become one of the top oil producing countries in the world again – some months producing more barrels than any other nation. That's contributed somewhat to lower prices at the pump, but it's also helped lift the economy by creating boom towns suddenly awash in high-wage jobs for middle class workers – the very ones who've seen the least growth in our recent recovery.

The economic multiplier is significant. Those areas have seen growth in a host of related businesses, while benefiting from the local spending done by blue collar workers who suddenly have more money in their hands. Previously depressed towns in places like rural west Texas and North Dakota have become economic miracles almost overnight.

Internationally, decreased demand from a slowing Chinese economy has also contributed to oil piling up on the supply side. Other countries like Russia, Venezuela and Nigeria that rely on energy revenues for too much of their revenues have felt a hard squeeze. Because too much of their economy relies upon oil, they're also unable to dampen output, forced to sell what they've got at a lower price, and even having to up production in order to sell more of a non-renewable resource at a lower price, just to keep things afloat.

Saudi Arabia has always been a country willing and capable of tightening the spigot in order to rein in excess world supply and has often used its influence as OPEC's primary decision maker to do just that. They have curiously opted to maintain output during this boom, however, prompting speculation that they are either trying to rein in Russia or discourage U.S. production.

Shale is way more expensive to get out of the ground than Saudi oil, which is among the least costly to extract. It generally takes oil prices of at least $70 per barrel (and more ideally somewhere around $100) for shale fracking operations to be cost effective. However, because many of these ventures were financed through bonds, the companies have very little ability to manipulate output and must continue to pump oil from the ground, even at a loss, in order to service the debt. There's some of that going on today which obviously compounds the problem, while signaling that prices are artificially deflated.

Most analysts feel that per-barrel prices that would equate to somewhere around $2.30 at the pump today would more accurately reflect what is happening in terms of supply and demand, but like I said, oil is not your typical commodity in which output can be easily adjusted, and all product costs roughly the same to produce – or gets cheaper as you build scale. As I noted, it's actually the opposite in most instances with the most expensive oil coming online last.

Meanwhile, lower prices have been a blessing for the U.S. economy. Not only do consumers have extra cash to spend on other goods and services, but the prices of everything from airline tickets to groceries and other shipped goods that are heavily dependent on transportation costs have come down at the same time that those wallets have fattened.

The downside of course is that Americans tend to quickly forget about alternatives as soon as cheap oil emerges, evidenced by declines in solar and other green technology investment, while sales of trucks and SUVs have risen. As Americans become even more addicted to oil, not only does the environment suffer, but the eventual readjustment in prices is guaranteed to be more difficult to bear.

Until then, however, I don't mind saying that I get a little shiver up my spine when I fill up the Civic and see $18 on the pump. Treating myself to an extra meal at a locally owned restaurant with the other $18 has been a delicious way to enjoy the leftovers, while keeping much more of that $36 working for our local economy. Enjoy it while it lasts.

Dennis Maley's column appears every Thursday and Sunday in The Bradenton Times. He can be reached at dennis.maley@thebradentontimes.com. Click here to visit his column archive. Click here to go to his bio page. You can also follow Dennis on Facebook.