Gas price drop could present problems for US oil producers

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Zahid Mehmood, a clerk at the 7-Eleven store on the corner of West Berry and University Drive in the 109, said that in the 12 years he has worked there, he has not seen gas prices drop so much.

“The drop in gas prices is very beneficial to my business,” Mehmood said.  “There are not only more people coming to this gas station but also coming into the store to purchase items.”

“It’s as if they have saved enough money on gas to make a purchase in my store,” Mehmood said.

As 109ers fill their tanks with cheaper gas – down 40 percent – they may be happy with the lower prices, but one TCU oil expert says that cheap oil may not be in the long-term best interest of the economy.

The gas price drop shows the influence Saudi Arabia has over the U.S. oil industry, according to Ken Morgan, director of the TCU Energy Institute.

“Saudi Arabia has decided to continue pumping at rates that exceed need,” Morgan said.  “When there is too much supply the demand isn’t as high, the price drops.”

It’s simple economics, Morgan said, because there is a lot of oil currently on the market.

It is a geopolitical game,” Morgan said. “When [the Saudis] want to flex their muscle and drive the prices down by providing so much oil to the U.S., they still make money.”

The problem with this is that it hurts the U.S. economy, Morgan said.  At first low gas prices seem beneficial, Morgan said,  but U.S. companies aren’t drilling now.

“It hurts the smaller companies,” Morgan said.  “They lay people off and do not drill anymore.  Now the Middle East has lowered prices, and when they do decide to pull back supplies, the price goes back up and it takes us a long time to get permits and rigs ready to produce for our own economy.”

 Morgan said that once the Middle East decides to increase prices, inflation results.  U.S. Oil companies do not have enough supply to set prices at a permanent low because costs are too much, Morgan said.  That is why prices change so drastically during certain times of the year.

“It shows the strength of the supplier,” Morgan said.  “We are the equivalent to a puppet on a string controlled by the Middle East.”

Prices may continue to drop for as long as Saudi Arabia wants to oversupply the U.S. with cheaper oil, said Larry Brogdon, board chair of the TCU Energy Institute and partner in Four Sevens Oil Company.

“You could see gas prices as low as $1.80 a gallon,” Brogdon said.  “The next week you could see it at double the price.”

According to the Bank of America Merrill Lynch Global research chart, U.S. oil producers cannot compete with the Middle East, which is currently selling at prices as low as $40 a barrel and still making revenue.

In order for U.S. companies to break even, their price per barrel would have to be above the average price per barrel that the Middle East is currently selling its oil, according to Merrill Lynch Global.

The Middle East has enough oil fields to produce at a much faster rate and charge at a much lower price per barrel, Brogdon said.

“The prices in Fort Worth will either go down or up in the next month depending on how much the Middle East is willing to charge,” Brogdon said.

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