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SuraLinkWritten by Steven Eilders, Manager, BMSS
Oil prices have once again become a focal point in global economic discussions as shifting geopolitical tensions and market dynamics spark questions about where things are headed ― especially with summer travel in full swing. In recent months, volatility in the Middle East, production decisions by OPEC+, and fluctuations in U.S. drilling activity have all contributed to changes in oil prices. But what do these developments actually mean for consumers, particularly when it comes to gas prices at the pump? In this update, we’ll discuss the key factors driving the oil market and what you may be able to expect in the months ahead.
What is happening with oil prices?
Since January of this year, the price for Cushing, OK WTI (West Texas Intermediate crude oil, a major benchmark for oil pricing, with its delivery point in Cushing, Oklahoma) has dropped from $75 per barrel in January to $68 per barrel in June, according to the U.S. Energy Information Administration (EIA). In May, prices dropped to $62.17, the lowest monthly price since early 2021, before climbing again due to heightened volatility surrounding the Israel-Iran conflict, as investors were concerned about potential supply disruptions. Iran is OPEC’s third-largest producer of crude oil, which means that any disruption in Iranian exports could have a significant impact on global oil prices.
The ceasefire in the Iran-Israel conflict has stabilized oil prices somewhat in recent weeks, as supply has not been meaningfully affected. However, we are now seeing a renewed price increase as OPEC+ has agreed to boost output by 548,000 barrels per day starting in August. While adding supply would normally reduce prices, OPEC+ is attempting to increase its market share, which has caused a slight uptick in prices.
This move is also supported by an EIA report showing that lower oil prices have slowed activity among many U.S. producers and drillers. With less domestic competition, OPEC+ can ramp up production without causing a significant price collapse ― at least for now. And, if OPEC+ continues to flood the market with crude, global prices will likely fall again. Based on OPEC+’s behavior so far this year, a production cut seems unlikely, meaning prices could continue to slide and some analysts even predict they could dip below $60, which would be among the lowest levels in the past five years.
What does all this mean for consumers?
For most U.S. consumers, this will likely translate into lower prices at the gas station. According to the EIA, the price per gallon of regular gasoline in the U.S. consists of four main components: 50% crude oil cost, 17% refining cost, 17% distribution and marketing, and 16% taxes. For diesel, the breakdown is slightly different: 45% crude oil, 15% refining, 23% distribution and marketing, and 17% taxes.
So, as crude oil prices drop, gasoline prices generally follow ― which is what we’ve seen over the past year. In May, the average price of gasoline was $3.17 per gallon, about 41 cents lower than in May of the previous year.
According to Bloomberg, ExxonMobil — one of the largest oil and gas companies in the world — is projecting a $1.5 billion decline in quarterly earnings due to lower crude oil prices.
However, lower gas prices may not materialize across the entire country. The U.S. is divided into five Petroleum Administration for Defense Districts (PADDs):
- PADD 1: East Coast
- PADD 2: Midwest
- PADD 3: Gulf Coast
- PADD 4: Rocky Mountains
- PADD 5: West Coast
Each region is expected to see a decrease in gasoline prices – except PADD 5. The West Coast could experience a price increase due to the announced closures of two California refineries: Phillips 66 is expected to shut down its Wilmington refinery in Los Angeles, and Valero will close its Benicia refinery in the Bay Area. These closures will reduce PADD 5’s refining capacity by 11%. With limited ability for other refineries to compensate, gasoline prices in that region are likely to rise.
The Bottom Line
While ongoing geopolitical tensions between Iran and Israel continue to create market uncertainty, the outlook for most U.S. consumers is relatively positive. With crude oil prices trending downward and OPEC+ taking advantage of reduced U.S. output, gas prices are expected to remain affordable across much of the country – offering some relief during the busy back-to-school season. However, regional differences, particularly on the West Coast, may lead to localized price increases due to refinery shutdowns.
The oil market remains highly sensitive to global events, and consumers should stay informed as conditions evolve.
If you’d like to discuss this more with your BMSS professional, please contact our offices at (833) CPA-BMSS or visit our website for contact information or industry information.