OPEC Ensures Fuel Prices to Remain Low

Production levels remain unchanged, pushing down price at pump.

by on Dec.02, 2014

Gas prices aren't going to drop to levels when you got it out of this pump, but they're expected to hit five-year lows.

The price of gasoline is expected to drift lower in the wake of the Organization of Petroleum Exporting Countries’ (OPEC) decision to maintain production at its current level. Not only are prices expected to remain low, the decision could have far-reaching effects around the world.

In fact, the OPEC decision on Thanksgiving Day could lower the price of gasoline throughout 2014 and into 2016, if OPEC doesn’t reverse course and the lower prices don’t undercut the drilling boom in the U.S.

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It also could become a challenge for carmakers, which are facing pressure to boost fuel economy of all new vehicles and possibly a global recession from what has become a reverse oil shock.

The AAA Daily Gas Gauge showed gasoline dropping to $2.769 on the first day of December from $2.776 over the weekend. The pump price for regular gasoline is now down 50 cents per gallon from a year ago and prices are expected to fall again.

The OPEC decision also has rattled the global energy markets and undercut the value of oil giants worldwide. Oil prices fell to their lowest level in five years on Monday, according to Reuters.

While the drop in oil prices is expected to boost consumer spending in the U.S. and elsewhere, analysts also worry the drop in prices could touch off a deflationary spiral that would reduce the prices of other commodities and undermine the prospects for growth in key parts of the global economy.

(Holiday gas prices at four-year low. For more, Click Here.)

Russian ruble, which is already stressed by the economic sanctions imposed because of the troubles in the Ukraine, dropped more than 4% against the dollar while Malaysia’s ringgit, which is also oil-dependent, was on course for its biggest two-day fall since the 1997-98 Asian financial crisis, Reuters reported.

(Click Here for details about the progress GM is making on its recalls.)

Automakers are trying to determine whether the current drop in prices is temporary or reflects a permanent change in the nature of the global energy markets. Energy markets are being pressured by the boom in American oil production, which has benefitted from the higher prices during the last half decade and the political turmoil in the Middle East, which has made it more difficult for countries such as Saudi Arabia, Iraq and Iran to reduce production since the governments need the revenue from oil production.

In addition, oil producers are also beginning to feel the pressure from the rising production of alternative energy, such as wind and solar, which is beginning to nibble away at demand in key markets such as the U.S., Europe and China.

(To see why France plans to phase out diesel engines, Click Here.)

For automakers a sustained drop in oil prices would require them to recalibrate their future product plans, which are now based on the assumption that fuel prices would continue to rise, reaching $5 to $6 per gallon by the end of the decade, according to estimates prepared by various carmakers.

The higher fuel prices were expected to help promote the use of new technology, smaller and lighter vehicles and the broader use of electric vehicles. However, that push will likely remain in place as the federal government has mandated corporate average fuel economy for their fleets to be 54.5 mpg by 2025.

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