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Recent oil market fluctuations and how prices at the pump responded

A Crude Relationship (Part 2)

by Adrian Cernea, Senior Consultant, CFS

Towards the end of 2014, global oil prices declined sharply. The downward trend started at the beginning of October 2014 and only showed signs of reversing at the beginning of February 2015. During this four-month period, world-wide crude went down by as much as 50%! The steep decrease in global oil prices was primarily a product of a worldwide oversupply of crude oil. This had a significant impact on the whole energy market.

The main culprit behind the drop was, not surprisingly, OPEC. More specifically, it was OPEC reacting to US oil production.

The United States have been constantly increasing their production of crude during the past decade. At the end of 2014, oil production was 50% greater than 2006 levels. This was sustained primarily by an increase in the use of hydraulic fracturing technology for shale oil extraction.

Now, there was more oil on the market than was needed. In this situation, typically, oil-producing countries reduce their production to balance the market. However, OPEC countries decided in late November 2014 to instead maintain their crude production targets. Historically, Saudi Arabia had acted as a unilateral global swing supplier to maintain prices of oil. Since it decided to not adjust its production, global oil prices went tumbling down. On top of this, most of the Libyan production returned to pre-conflict levels while Iraq registered the highest production in the last 35 years. These increases by the OPEC countries to the already overflowing supply of crude reflects why we saw the staggering 50% drop in price of crude oil.

Let’s move to the pump. Across Canada, gasoline prices also went down, putting a smile on the faces of those of us who spend (a lot of) time behind the wheel, usually mired in heavy rush-hour traffic. From coast to coast, every driver paid less to fill up. Gasoline prices went down by as much as 25% in certain parts of the country. In Toronto, for example, it has been a while since you could watch the litres dial at the gas station roll faster than the dollar dial. This miracle only lasted so long though, as gas prices started to rebound in February 2015. However, this short-lived bliss also had its dark side.

One very interesting question comes out of this: why, if crude prices went down by 50%, gasoline only dropped by 25%? The answer, as usual when dealing with energy, is complicated. Don’t miss the next article that focuses on the interaction between the oil producing companies, refineries and retailers. It will cover some of the intricacies of the road travelled by hydrocarbons from well to pump and how the governments and energy corporations play this game.

Stay tuned for next week’s article in this series: From the ground to the tank: a sinuous hydrocarbon odyssey

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