Low Crude Prices Not Good for All

Texas Among Eight States that May Suffer From Lower Oil Prices
Low prices impacts Texas economy

Impact of Lower Oil Prices

Texas gasoline prices are averaging under $2.00, the lowest we have seen in years. While this was a nice perk for consumers over the holiday season, it is still unclear how cheaper crude will impact the overall health of the Texas economy.

One Washington think tank has estimated that, though many parts of the country will experience a slight economic stimulus in 2015, the lower oil prices will bring a significant downturn in the economic health of energy dependent states.

Unprecedented production in the United States shale plays have contributed to an increase in worldwide oil supplies, resulting in gasoline prices plummeting to their lowest level in almost five years. This has proven to be an economic boom of sorts to American families who are pocketing an additional $25-$75 per month. An additional perk will come as reduced fuel costs will eventually affect the pricing of consumer goods and services.

Stephen Brown with Resources for the Future writes that, “The reduction in oil prices provides US consumers with what amounts to an annual increase in disposable income of $350 billion (about 2.0 percent of US GDP) through reduced prices for gasoline, diesel fuel, other petroleum products, and goods and services whose production uses petroleum products. The average US household will see a raw gain that amounts to $2,790 per year.”

The economic picture is not so rosy for everyone. Energy producers and states that are heavily invested in oil production will take a hit in 2015. Some companies have announced they will slash their budgets, with many predicting cuts in their exploration efforts. This will have a ripple effect that will impact local economies and support industries as tax revenues are reduced and layoffs are inevitable.

And Texas is not immune. The New york Times reports that Hercules Offshore has plans to lay off some 300 employees. This is in addition to the already 2,300 oil and gas jobs lost in Texas from October – November.

Download the entire report from rff.com.

How the Eagle Ford Impacts the Price at the Pump

EIA: Eagle Ford Expected to Produce 1.5 Million b/d in Sept. 2014
Eagle Ford Contour Map

Eagle Ford Depth Map | Click to Enlarge

The Eagle Ford Shale is a powerhouse play for Texas, and it is even bigger than the last great Texas oil boom that began with Spindletop at the turn of the last century. Texans and all Americans are reaping the benefits of this modern day boom, and where this may be most evident is at the gas pump.

It wasn’t long ago that the price of a gallon of gas in Texas was well above $4 a gallon, and although Texans may still feel some pain at the pump, the prices could be much higher if it wasn’t for the Eagle Ford Shale and the oil and gas renaissance taking place in the U.S. Some industry professionals speculate the price of a gallon of gas could be as much $7 – $8 dollars a gallon if it wasn’t for the shale oil boom, made possible by advances in horizontal drilling and fracking.

Read more: North Dakota & Texas Make Up Half of U.S. Oil Production

What Determines the Price of a Gallon of Gas

According to the Energy Information Administration (EIA), there are four main components that go into the retail price of a gallon of gas:

  • Crude Oil (67%)
  • Refining Costs and Profits (14%)
  • Distribution, Marketing, and Retail Costs and Profits (8%)
  • Federal and State Taxes (12%)

The majority of the price, as shown by the breakdown, comes from crude oil, which is determined by commodities traders. World-wide supply and demand are key factors in influencing pricing.

With the U.S. poised to become the top oil producing country in the world by 2015, more supply has entered the world market, and that has ultimately impacted the price of crude oil. There are a number of other factors (i.e. global political upheaval) that are beyond the scope of this post, and they are all taken into account when determining the price of oil futures.

How the Eagle Ford Impacts Crude Oil Supply

The Eagle Ford alone produces nearly 1.5-million b/d. That’s more than half of total production for the entire state of Texas. The U.S. currently produces around 11-million b/d.

Read More: EIA: Eagle Ford Oil Production Will Hit 1.5-Million b/d – Sept. 2014

By comparison, Iraq, which is currently rated as the second largest OPEC producer, produced 3.2-million b/d in April of 2014. By June of this year, Texas’ total monthly production surpassed that of Iraq, as its production dropped below 3-million b/d.

Production growth is expected to continue in the Eagle Ford, and for the immediate future, it will remain a top supplier of U.S. crude oil. That equates to the Eagle Ford continuing to play a role in influencing the price of oil.