MONEY Gas

Where Gas Prices Shot Up Nearly $1 Per Gallon in One Month

A cyclist rides by a sign at a gas station in Los Angeles posting the latest gas prices on Friday, Feb. 27, 2015. Gas prices in California soared overnight as a result of a combination of supply-and-demand factors worsened by the shutdown of two refineries that produce a combined 16 percent of the state’s gasoline.
Nick Ut—AP A cyclist rides by a sign at a gas station in Los Angeles posting the latest gas prices on Friday, Feb. 27, 2015.

Everyone is paying more at the pump lately. But California drivers have seen gas prices soar at an unbelievably fast pace.

In mid-January 2015, the national average for regular gasoline was $2.03 per gallon, and there seemed to be a strong possibility that gas stations would average under $2 nationally within weeks, or even days. Instead, that period marked what appears to be the bottoming out of the cheap gas era. After four months of consistently plummeting fuel costs, drivers began seeing gas prices inch up steadily—and then spike very recently.

Over the past week, the national average has crept up 2¢ daily, from $2.33 to $2.47 as of Monday, according to the U.S. Energy Information Administration. AAA data indicates that gas prices have risen 35 days in a row, for a total rise of 39¢ nationally.

While all drivers are paying more for gas than they did in the very recent past—more than a dozen states were averaging under $2 per gallon a month ago, but none are today—California has experienced an extraordinarily fast hike in prices at the pump. Apparently, an explosion at one oil refinery in the state brought about enough of a decrease in supply to send gas prices skyrocketing.

As of Tuesday, the average in California for a gallon of regular was $3.41, a rise of 96¢ over the past month and 43¢ during the last week alone. Nationally, gas prices are averaging a full $1 less than they were one year ago, even after the recent pricing surge. But in California, prices are only 45¢ cheaper than they were exactly 12 months ago, when the average was $3.86.

All signs indicate that drivers in California and all over the country will continue to be hit with rising gas prices. GasBuddy analysts forecast that prices will increase steadily during the next six to eight weeks, and AAA is predicting, “the national average price of gas could rise by 20 cents per gallon or more in March” alone.

Still, to put things in perspective, let’s not forget that gas prices averaged well over $3 nationally for entire years, and it seemed like a very big deal when the average dipped under $3 last fall.

“The good news is that most U.S. drivers should still pay less than $3 per gallon to fill up their cars this year,” AAA spokesperson Avery Ash said this week.

Not if you’re in California though.

TIME energy

The Easy Oil Is Gone, So Where Do We Look Now?

Oil Rig Drill
Getty Images

Studies point to the Middle East, Latin America, North America and Africa as the key regions for future oil plays

In 2008, Canadian economist Jeff Rubin stunned the oil market with a bold prediction: With the world economy growing at 5 percent a year, oil demand would grow with it, outpacing supply, thus lifting the oil price from $147 to over $200 a barrel.

The former chief economist at CIBC World Markets was so convinced of his thesis, he wrote a book about it. “Why the World is About to Get a Whole Lot Smaller” forecast a sea change in the global economy, all driven by unsustainably high oil prices, where domestic manufacturing is reinvigorated at the expense of seaborne trade and people’s choices become driven by the ever-increasing prices of fossil fuels.

In the book, Rubin dedicates an entire chapter to the changing oil supply picture, with his main argument being that oil companies “have their hands between the cushions” looking for new oil, since all the easily recoverable oil is either gone or continues to be depleted – at the rate of around 6.7% a year (IEA figures). “Even if the depletion rate stops rising, we must find nearly 20 million barrels a day of new production over the next five years simply to keep global production at its current level,” Rubin wrote, adding that the new oil will match the same level of consumption in 2015, as five years earlier in 2010. In other words, new oil supplies can’t keep up with demand.

Of course, Rubin at the time was talking about conventional oil – land-based and undersea oil – as well as unconventional oil sands. The shale oil “revolution” in the United States that took off soon after the publication of his book has certainly changed the supply picture, and the recent collapse in oil prices has forced Rubin to eat his words. With U.S. shale oil production soaring from 600,000 barrels a day in 2008 to 3.5 million barrels a day in 2014, the United States over the past few years has flooded the market with new oil from its shale formations, including the Eagle Ford in South Texas and the Bakken in North Dakota. According to the Energy Information Administration (EIA), total U.S. production (conventional and unconventional) will increase to 9.3 million barrels a day this year, the most since 1972.

Read more: This Huge Oil Buyer Is Appearing Nextdoor To The U.S.

While some observers, including oil giant BP, are now predicting a slowdown in U.S. shale oil production as wells are depleted at a faster rate, to be replaced by Middle Eastern output that has lost ground to U.S. shale, the thesis posed by Jeff Rubin in 2008, that the world is running out of oil, seems to have changed to: Is the world swimming in oil?

In this continuing climate of abundant oil production, Oilprice.com sought to find out where the new oil will be found. The data could be used in a further analysis to determine whether an oversupplied market will continue to depress oil prices into the future – or whether a price correction is likely given a tightening of the market on the supply side.

According to a 2013 report by Wood Mackenzie, the world holds 1.4 trillion barrels of oil equivalent oil and gas reserves, with the Middle East, Latin America, North America and Africa identified as the key regions for future oil plays.

Of course, many of the new fields are uneconomic at current prices, so it is instructive to look at the largest oil fields to see where oil producers are likely to keep pumping, even though many of these fields are in decline.

They include Ghawar and Safaniya in Saudi Arabia, Burgan in Kuwait, and Rumalia and West Qurna-2 in Iraq. These five fields were named the most important by Oilprice.com in an article last June. Ghawar, the world’s largest field, has an estimated 70 billion barrels of remaining reserves, more than all but seven other countries, according to the EIA. In production since the 1950s, it continues to produce at 5 million barrels a day.

If you noticed the dominance of the Middle East in this list, you’d be right. Current estimates have over 80 percent of the world’s proven oil reserves located in OPEC member countries, with Middle Eastern reserves comprising 65 percent of the OPEC total.

Adding to the Oilprice.com list, Forbes named Majnoon in Iraq, Khuzestan (also the name of a province) in Iran, Kashagan in the Caspian Sea, Khurais in Saudi Arabia, the Tupi field offshore Brazil, Carabobo in Venezuela’s Orinoco heavy oil belt, and the North Slope of Alaska among its top 10 fields of the future.

Fortune places the Orinoco belt in Venezuela among its six largest untapped fields, at an eye-watering 513 billion barrels of recoverable crude. In comparison the Chicontapec Basin in Mexico, also on the list, is a Lilliputian at 10 billion barrels. Others include the Santos and Campos Basins in offshore Brazil, at 123 billion barrels, the Supergiant field in the southwest desert of Iraq, at between 45 and 100 billion barrels, and the Jubilee Field in Ghana, estimated to contain 1.8 billion barrels of recoverable crude.

The Canadian oil sands should of course also be included in the matrix of future oil supply. Despite the difficulty and higher-cost, compared to conventional sources, of stripping the bitumen from the oil sands and processing it into heavy oil, the vastness of the reserves contained in the sands of northern Alberta cannot be underestimated. According to the Alberta government the oil sands has proven reserves of about 168 billion barrels, the third largest proven crude oil reserve in the world, after Saudi Arabia and Venezuela. Canadian oil sands production is forecasted to grow from about 2 million barrels per day to 3.7 million barrels per day by 2020 and 5.2 million barrels per day by 2030, according to Alberta Energy.

Many have pointed to the Arctic as the answer to the depletion of existing oil and gas fields. The region, which crosses Russia, Alaska, Norway and Greenland, is estimated to hold 166 billion barrels of oil equivalent, more oil and gas than Iran and enough to meet the world’s entire consumption of crude oil for five years, reported The Daily Telegraph.

Drilling down a bit further, the US Geological Survey estimates that over 87% of the Arctic’s oil and gas resources are located in seven Arctic basin provinces: Arctic Alaska Basin, East Barents Basin, East Greenland Basin, West Greenland East Canada Basin, East Greenland Rift Basin, West Siberian Basin and the Yenisey-Khatang Basin.

The Prudhoe Bay field in Alaska, which has been pumping oil since 1977, is the largest oil field in North America, at about 25 billion barrels. Around 16 percent of the Arctic’s undiscovered oil and gas is located on land, with the remaining potential either locked in continental shelves or underwater at depths over 500 metres.

Of the seven basins outlined by the USGS, the most abundant is Arctic Alaska, at 29.36 billion barrels of crude oil, followed by the Amerasia Basin, at 9.72 billon, and the East Greenland Rift Basin at 8.90 billion, according to Geology.com.

Among the oil majors eyeing the Arctic prize, Shell has been drilling off the coast of Alaska for decades, Statoil is active in the Norwegian Arctic, and ExxonMobil is exploring with Russia’s Rosneft in the Russian far north. Last year Rosneft/ ExxonMobil discovered a field that could hold up to 730 million barrels of oil, but for the time being, exploration looks thin. With low oil prices, most oil companies are reining in capital costs, and exploration expenditures are a high-priority line item. Statoil and Chevron have both put their Arctic plans on ice, and the ExxonMobil partnership with Rosneft could be in trouble due to Western sanctions against Russia. Shell is currently the only company sinking any capital into the Arctic, with the Anglo-Dutch firm announcing at the end of January that it plans to proceed with a $1-billion Arctic drilling this summer.

Read more: Is Oil Returning To $100 Or Dropping To $10?

And what of the shale oil reserves that have propelled the United States to becoming close to energy-independent and threaten to knock Saudi Arabia off its pedestal as the world’s top oil producer? In 2013, the EIA conducted the first-ever U.S. analysis of global shale oil reserves. It estimated “technically recoverable” (as opposed to economically recoverable) shale oil resources of 345 billion barrels in 42 countries, the equivalent of 10 percent of global crude oil supplies – and enough to cover over a decade of oil consumption.

According to the EIA, Russia and the United States have the largest shale oil resources, at a respective 75 billion barrels and 58 billion barrels, followed by China, Argentina and Libya. The other countries on the top 10 list of countries with technically recoverable shale include Australia, Venezuela, Mexico, Pakistan and Canada.

The EIA report also shows a marked increase in the number of prospective shale deposits globally compared to an earlier 2011 report. That report listed 32 countries with shale versus 41 in 2013, 48 basins versus 95, and half the number of formations, at 69 in 2011 versus 137 in 2013.

This article originally appeared on Oilprice.com.

More from Oilprice.com:

MONEY Gas

Here’s What Americans Are Doing With the Gas Money They’re Saving

Gas nozzle and money
Tim McCaig—Getty Images

The government's Energy Information Administration estimates the average household will spend $750 less on gas this year. So where's that money going?

Americans are enjoying a nice raise at the moment, in the form of dramatically lower gas prices. The government’s Energy Information Administration estimates that the average household will spend $750 less on gas this year, which is like getting a roughly $1,000 raise, since the savings aren’t taxed. For a little perspective, the 2008 economic stimulus package passed by Congress designed to save America from the worst of the recession sent a maximum of $600 to American households.

The gas price drop means even more to struggling lower-income earners: the bottom fifth of earners spend 13% of their income on gas.

That’s the good news. The bad news? Retailers aren’t seeing much, if any, of that money.

Americans spent $6.7 billion less on gas in January than November, but retail spending actually fell slightly during that span. That means lower gas prices are not acting as a surprise stimulus plan for the economy.

So where is the money going? To the bank.

The Federal Reserve Bank of St. Louis recently reported that Americans’ notoriously low personal savings rate spiked in December, to 4.9%, from 4.3% the previous month. The cash that’s not going into the gas tank is going into savings and checking accounts instead.

Few Americans save enough money, and many have insufficient rainy-day funds. With the recession fresh in their minds, many Americans appear to be more concerned with restoring their severely damaged net worth than buying stuff.

But Logan Mohtashami, a market observer and mortgage analyst, suspects something else might be at play.

“People don’t think the gas price (drop) is a long-term reality,” Mohtashami said. Despite government predictions to the contrary, he says, consumers aren’t adjusting their spending to a new normal, and instead they’re holding onto their cash for the next rise in prices.

Again, that kind of pessimism is sensible, and it’s good for personal bank accounts, but it’s not so good for growing the economy.

How much are you saving thanks to lower gas prices? What are you doing with the “raise?” saving or paying down debt? Planning a better vacation? Driving a gas-guzzler more often? Let me know in the comments, or email me at bob@credit.com.

More from Credit.com

This article originally appeared on Credit.com.

MONEY Leisure

Casino Revenues Surge as Gas Prices Fall

MGM Grand Hotel & Casino Detroit at night, Michigan.
Benjamin Beytekin—dpa/AP Images

Long-struggling regional casinos have been enjoying a surge in gambling revenues, seemingly out of the blue. Could cheap gas have something to do with it?

Regional casinos—the kind that people typically drive to for a night, rather than fly in for the weekend—seem to have been victims of their own success. As casino revenues increased for years, more and more states wanted in on the action and began welcoming casinos and other gaming venues in order to (hopefully) haul in big bucks by taxing all the money streaming through these places. At some point in recent years, however, observers began worrying that many regions had reached a casino saturation point, the marker at which gambling revenues would level off because there simply aren’t enough customers around to keep throwing money at these establishments.

In 2014, many casinos saw revenues go flat, and a handful of casinos went out of business in spots that were once regional gambling magnets, Mississippi and Atlantic City. Yet as 2014 came to a close and 2015 began, the tables seem to have turned for many casinos around the country.

Five of the six casinos in the St. Louis area reported bringing in more revenues in January 2015 than they did the year before. Detroit’s three casinos collectively saw gambling revenues rise 15% last month compared with January 2014. Even in Connecticut, where the casino business has been on the decline for years largely thanks to increased competition, gambling revenues are on the upswing lately.

In Atlantic City, meanwhile, in January the eight casinos still in business took in revenues that were 19% higher than the same month in 2014. Even when the four A.C. casinos that were open in January 2014 but are now closed are factored in, Atlantic City’s overall gambling revenues are up nearly 1% compared with a year ago—and again, that’s with four fewer casinos to work with.

What’s behind the seemingly sudden surge in casino gambling? Many observers point to low gas prices as a key factor. The late 2014 gambling increase just so happened to coincide with ever cheaper gas prices at the pump. To many, this was no coincidence at all. In other words, the idea is that people have been taking the money they’re “saving” on cheaper gas and driving it on over to the slot machines and table games at their nearby casino.

In late January, the Las Vegas Review-Journal reported that two notable gaming analysts were forecasting rebounds in 2015 for regional casinos, in particular in the South and Midwest. “Several data points have developed which could point to the beginning of a recovery,” said Morgan Stanley gaming analyst Thomas Allen.

According to Allen, regional casinos have noticed that business has picked up especially among lower-income customers—the demographic that’s most likely to feel the impact of cheaper gas prices and, presumably, act on it.

Data cited by the Baltimore Sun, indicating that Maryland casino revenues have declined for two months in a row, might seem to blow a hole in the theory that cheaper gas is playing a major role in increased casino gambling. Yet Maryland’s casino revenues were soaring in late summer and autumn 2014 thanks largely to the opening of the new Horseshoe Casino Baltimore in August. It appears as if the novelty of the new casino has worn off, and indeed, Maryland’s revenues in December ($85.6 million) and January ($84.9 million) were down slightly compared with the all-time high hit in November ($90.2 million). In fact, Maryland’s overall casino revenues in January 2015 are up $18 million, or 28%, compared to the same month a year ago (when there was one fewer casino). So it’s too simple to state that the state’s gambling revenues are on the decline.

In any event, if there is some credence to the concept that low gas prices are giving local casinos a bump in business, these gambling havens may not be the beneficiaries of cheap fuel bills for long. If you haven’t noticed, gas prices have been climbing swiftly in February, although they’re still plenty cheap enough to justify a quick road trip. Now, where might you go?

MONEY Gas

Gas Prices Spike More Than 20¢ Per Gallon Overnight

The price of gas is displayed in downtown Midland on February 4, 2015 in Midland, Texas.
Spencer Platt—Getty Images

The national average for a gallon of regular is up 10¢ over the past three days, and in some parts of the country, prices jumped more than 20¢ overnight.

What was a slow rebound in gas prices at stations around the U.S. has picked up the pace significantly over the past few days. Last week, the national average bottomed out at $2.03 per gallon, before inching up to $2.05 on Monday, according to AAA. It then spiked up to $2.11 on Wednesday and $2.15 today.

Drivers in certain parts of the country have seen gas prices increase in alarmingly quick fashion, far outpacing the rise in the national average. In central Ohio, for instance, the average price for a gallon of regular was $2.26 on Wednesday, up from $2.04 the day before. As of Thursday, AAA reports that the statewide per-gallon average in Ohio is up to $2.27.

The gas-price tracking service GasBuddy reported that 26 metropolitan areas in the U.S. saw spikes of 15¢ or more per gallon from Tuesday to Wednesday of this week. Michigan has been hit especially hard: Eight out of the nation’s top 15 highest price increases in occurred in the state, including the three largest spikes. Up until last week, Michigan had enjoyed five straight weeks of sub-$2 gas; at last check, the statewide average was $2.28.

Meanwhile, drivers in states where the average has been under $2 for weeks should reacclimate themselves with having to pay more at the pump: The averages in Alabama, Arizona, Colorado, Kansas, Louisiana, Missouri, New Jersey, New Mexico, Oklahoma, Texas, and Wyoming have all inched up back to within two or three pennies of the $2 threshold.

Even if prices continue to creep higher in the short term, however, drivers won’t necessarily be subjected to ever-higher prices at the pump in the months ahead. On Wednesday, the Wall Street Journal noted, U.S. oil stockpiles rose unexpectedly to 6.3 million barrels—which is the highest it’s been at this time of year in at least eight decades. When there’s a surplus of oil, wholesale prices drop, and that generally translates to a subsequent drop in retail prices at gas stations.

No one knows for sure where gas prices are heading, but even after the recent spike, drivers in many parts of the country are still paying less than $2 per gallon—an absolute bargain compared to 2011, 2012, and 2013, when the year-long national averages were $3.49 or higher. And most signs indicate that prices won’t be heading back to those kinds of levels anytime soon.

MONEY Autos

Car Ownership Has Peaked—or Maybe It Hasn’t

new cars on the lot
Per-Anders Pettersson—Getty Images

After a strong January for the auto industry, forecasts call for rising car sales in 2015—followed by more increases in the years ahead. So what's this business about already hitting "Peak Car"?

Based on research from the asset management firm Schroders, Quartz recently made the case that “the Western world’s century-old love affair with the automobile is coming to an end.”

By and large, the data indicate that people around the world—young people in particular—are driving less, less interested in owning cars, and even less likely to bother getting driver’s licenses. In light of such statistics, the argument is that America, and perhaps the world as a whole, has reached the marker that’s been dubbed as “Peak Car,” the point at which car sales and ownership and driving in general go no higher.

“Our research illustrates that for the past decade the developed world has shown signs of hitting ‘peak car,’ a plateau or peak in vehicle ownership and usage,” the Schroders study states plainly.

At the same time, however, Automotive News and others point this week to the new IHS report forecasting that global auto sales will hit 88.6 million in 2015, which would mean a 2.4% increase over 2014 and would mark the fifth year in a row of increasing car sales. Not all parts of the world are expected to be buying more vehicles: Despite cheap gas prices, car sales in South America, Russia, and Western Europe are likely to be underwhelming. Yet strong sales are anticipated by IHS in North America and China, bringing about a “slower, not lower” overall rise in the auto market globally.

Car dealership sales in the northeastern U.S. were likely hurt in January due to major snowstorms, and yet just-reported auto sales for the month have been impressive. It’s expected that automakers will post brag-worthy sales increases of 14% or more, compared with the same period a year ago. At such a pace, total sales for the year could reach 17 million.

IHS’s forecast calls for light-vehicle sales of 16.9 million in the U.S. in 2015, and that might be on the low side. “With a strong exit to 2014, and gasoline prices currently plunging, consumers may feel even more positive throughout 2015,” an IHS statement said. And the IHS report calls for higher sales tallies going forward, with predictions of 17.2 million U.S. car sales in 2016 and 17.5 million in 2017. If that last prediction is realized, it would mean a new peak for the nation, which experienced what was then an all-time high of 17.4 million sales in 2000.

In other words, IHS researchers are saying that neither the U.S. nor the world has reached Peak Car, and that from the looks of things we won’t hit that point for years to come. The Economist has also made the case that, despite millennials’ apparent preference for urban living and lack of enthusiasm for driving and car ownership, “it is not clear that declining car ownership among young urbanites will have more than a marginal effect on overall car sales,” and that Peak Car “still seems quite a long way off.”

The researchers at Schroders and IHS can’t both be right. So who is wrong? Well, we should point out that one of Schroders’ graphs illustrates how consumer interest in buying cars has rebounded across all age groups since the Great Recession ended. Also, some of Schroders’ data is dated: The most recent drivers’ license statistics are from 2010, for instance, while the numbers reflecting a rising propensity to buy cars in the U.S. go no further than 2012.

On the other hand, there are compelling, data-driven arguments that millennials will never love automobiles as much as car-crazed Baby Boomers, that the average number of vehicles owned per driver (or household) will never be as high as it once was, and that people all over the world will be out on the roads less year after year thanks partly to smartphones, e-commerce, car sharing, and other technologies. At the same time, it sure looks like auto sales will be on the rise globally and in the U.S. in 2015, and the year after that, and the year after that, and … who knows?

If Google and/or Uber manage to create and perfect a practical driverless taxi in the near future, all bets—and forecasts—could be off.

MONEY Gas

Gas Prices Starting to Rise

gas coming out of nozzle and rising
Microzoa—Getty Images

After dropping mightily for four months in a row, prices at the pump appear to have bottomed out—meaning you'll probably pay more than $2 a gallon again soon, if you aren't already.

Last week, something weird happened: Gas prices rose. In most years, an increase in gas prices around now isn’t unusual at all. In fact, a gas price hike at the start of the year has become more or less an annual tradition lately. But this year, the late January rise ended a historic decline in fuel prices that stretched 123 consecutive days.

That rare increase in prices at the pump appears to be no fluke. According to AAA, the national average for a gallon of regular bottomed out at about $2.03 last week. The average has since inched up a penny or fraction of a penny here and there, reversing earlier trends in which it dropped 1¢ daily for weeks. Yesterday, the national average hit $2.056, and it’s up to $2.067 on Tuesday.

Very recently, AAA forecast that the national average would dip below $2 a gallon by the start of February. Now it looks like we’ll never get there. Instead, AAA researchers and other gas analysts are saying that prices are likely on the upswing through spring.

“It is a good bet that most drivers will pay more for gasoline in March than today,” AAA spokesperson Avery Ash said in a press release this week.

Oil refineries have reduced their output lately, and the result is rising wholesale gasoline prices—which translate to rising consumer prices as well, GasBuddy senior analyst Gregg Laskoski explained in a post published Monday: “From Jan. 7 up to this morning, wholesale prices on average are up 23 cents per gallon so there’s no doubt now that the first-quarter climb is under way and is already being reflected in rising prices at the pump.”

In all likelihood, the gas stations that will see the steepest price increases are the ones that have been selling the cheapest gas in recent weeks. For instance, the statewide average in California is currently $2.45 per gallon, but some stations have been trying to woo customers with prices under $2. It’s these kinds of stations, GasBuddy analyst Allison Mac told the Sacramento Bee, that “will see the most dramatic change. Those are the stations that are going to see 20 to 30 cents [price-per-gallon increases], probably over the next couple of weeks into mid-February.”

Even with the tides turning toward higher gas prices, drivers should keep in mind that fuel costs remain exceptionally cheap. This week’s message from AAA noted that more than half the gas stations in the U.S. still have gas under $2 per gallon, that the average last month was $2.11—incredibly cheap compared to $3.30 in January 2014—and that it does not expect the national average to ever surpass $3 in 2015. Mind you, the average was well over the $3 mark for the majority of 2014, and it was considered a big deal when prices dipped under $3 at any station. What’s more, the national averages for the years 2012 and 2013 were well over $3 per gallon.

In other words, even if gas prices creep upward for months, drivers will still be paying far less than they have during the past few years.

MONEY Gas

Gas Prices Rise for the First Time in 4 Months

That incredible drop in the cost of filling up your car has taken a very small break.

MONEY Airlines

Airlines Drop Fuel Surcharges, but Flights Don’t Get Cheaper

A Boeing Co. 737 aircraft operated by Qantas Airways Ltd. flies past the air traffic control tower as it lands at Sydney Airport in Sydney, Australia
Brendon Thorne—Bloomberg via Getty Images A Boeing Co. 737 aircraft operated by Qantas Airways Ltd. flies past the air traffic control tower as it lands at Sydney Airport in Sydney, Australia

Two airlines recently removed those annoying fuel surcharges that have been tacked onto passenger tickets for years. So that means airfare is less expensive, right? Nope.

The idea of a fuel surcharge is pretty simple: When the cost of fuel is abnormally high, instead of simply raising prices, a special, supposedly temporary fee is passed along to customers. When fuel costs retreat back to “normal” levels, logic dictates that the surcharge would disappear.

It’s this kind of wholly logical thinking that has had airline travelers up in arms over the last several months, as the price of gasoline and rocket fuel has declined substantially, yet fuel surcharges remain and airfares are still extraordinarily high. Consumer advocacy groups Travelers United and FlyersRights.org recently sent letters to airline CEOs voicing their outrage and demanding that airfares be lowered “in light of the 50% reduction in jet fuel prices since June, 2014.”

“Common sense says prices should drop when the biggest cost factor in flying nosedives,” Charlie Leocha, chairman of Travelers United, said via press release. “This isn’t rocket science. Though economists can make lots of excuses, if there were more competition, consumers would be seeing lower costs to fly.”

At first glance, it appears as if some of this madness is coming to an end Down Under. As the Sydney Morning Herald put it, Virgin Australia recently announced it was removing “consumer-reviled references to fuel surcharge” from its tickets. This surcharge added as much as AUD$680 (US$540) to the cost of an international round trip. Qantas, which competes with Virgin Australia on many routes, including flights between the U.S. and Australia, followed suit by saying that it too would get rid of fuel surcharges on tickets.

To which travelers might reasonably respond: Hallelujah!

Not so fast. The removal of these hated, astronomically expensive fees is having little to no impact on the actual cost of airfare paid by travelers. For the most part, the airlines are simply incorporating fuel charges into base airfare prices, and the amount paid out of pocket by passengers will remain stubbornly high.

Virgin America said that coach passengers can expect to see a decrease of perhaps AUD$40 (a measly $32 in U.S. currency) on tickets between the U.S. and Australia. Mind you, the old surcharge hit passengers to the tune of AUD$680 (US$540). As for Qantas, its airfares will remain exactly the same even as fuel surcharges disappear.

In other words, the carriers are jacking up flight prices to compensate for the “removal” of fuel surcharges. They’re giving travelers a price break with one hand while taking more money away from customers with the other. The net result is that passengers are paying pretty much the same for the cost of transportation before the changes were announced. The only thing that’s changed is how the airlines break down the flight costs.

To airline passengers, who want their total out-of-pocket costs to drop, and who couldn’t care less about how the airlines categorize each component of a flight’s price, these “changes” mean that nothing at all has really changed.

MONEY Oil

Why Oil Prices May Not Recover Anytime Soon

A worker waits to connect a drill bit on Endeavor Energy Resources LP's Big Dog Drilling Rig 22 in the Permian basin outside of Midland, Texas, U.S., on Friday, Dec. 12, 2014.
Brittany Sowacke—Bloomberg via Getty Images

Things could get worse for the oil industry before they get better.

Oil prices have collapsed in stunning fashion in the past few months. The spot price of Brent crude reached $115 a barrel in June, and was above $100 a barrel as recently as September. Since then, it has plummeted to less than $50 a barrel.

Brent Crude Oil Spot Price Chart

There is a sharp split among energy experts about the future direction of oil prices. Saudi Prince Alwaleed bin Talal recently stated that oil prices could keep falling for quite a while and opined that $100 a barrel oil will never come back. Earlier this month, investment bank Goldman Sachs weighed in by slashing its short-term oil price target from $80 a barrel all the way to $42 a barrel.

But there are still plenty of optimists like billionaire T. Boone Pickens, who has vocally argued that oil will bounce back to $100 a barrel within 12 months-18 months. Pickens thinks that Saudi Arabia will eventually give in and cut production. However, this may be wishful thinking. Supply and demand fundamentals point to more lean times ahead for oil producers.

Oil supply is comfortably ahead of demand

The International Energy Agency assesses the state of the global oil market each month. Lately, it has been sounding the alarm about the continuing supply demand imbalance.

The IEA currently projects that supply will outstrip demand by more than 1 million barrels per day, or bpd, this quarter, and by nearly 1.5 million bpd in Q2 before falling in line with demand in the second half of the year, when oil demand is seasonally stronger.

That said, these projections are built on the assumption that OPEC production will total 30 million bpd: its official quota. However, OPEC production was 480,000 bpd above the quota in December. At that rate, the supply-and-demand gap could reach nearly 2 million bpd in Q2.

Theoretically, this gap between supply and demand could be closed either through reduced supply or increased demand. However, at the moment economic growth is slowing across much of the world. For oil demand to grow significantly, global GDP growth will have to speed up.

It would take several years for the process of lower energy prices helping economic growth and thereby stimulating higher oil demand to play out. Thus, supply cuts will be necessary if oil prices are to rebound in the next two years-three years.

Will OPEC cut production?

There are two potential ways that global oil production can be reduced. One possibility is that OPEC will cut production to prop up oil prices. The other possibility is that supply will fall into line with demand through market forces, with lower oil prices driving reductions in drilling activity in high-cost areas, leading to lower production.

OPEC is a wild card. A few individuals effectively control OPEC’s production activity, particularly because Saudi Arabia has historically borne the brunt of OPEC production cuts. Right now, the powers that be favor letting market forces work.

There’s always a chance that they will reconsider in the future. However, the strategic argument for Saudi Arabia maintaining its production level is fairly compelling. In fact, Saudi Arabia has already tried the opposite approach.

In the 1980s, as a surge in oil prices drove a similar uptick in non-OPEC drilling and a decline in oil consumption, Saudi Arabia tried to prop up oil prices. The results were disastrous. Saudi Arabia cut its production from more than 10 million bpd in 1980 to less than 2.5 million bpd by 1985 and still couldn’t keep prices up.

Other countries in OPEC could try to chip in with their own production cuts to take the burden off Saudi Arabia. However, the other members of OPEC have historically been unreliable when it comes to following production quotas. It’s unlikely that they would be more successful today.

The problem is that these countries face a “prisoner’s dilemma” situation. Collectively, it might be in their interest to cut production. But each individual country is better off cheating on the agreement in order to sell more oil at the prevailing price, no matter what the other countries do. With no good enforcement mechanisms, these agreements regularly break down.

Market forces: moving slowly

The other way that supply can be brought back into balance with demand is through market forces. Indeed, at least some shale oil production has a breakeven price of $70 a barrel-$80 a barrel or more.

This might make it seem that balance will be reasserted within a short time. However, there’s an important difference between accounting profit and cash earnings. Oil projects take time to execute, involving a significant amount of up-front capital spending. Only a portion of the total cost of a project is incurred at the time that a well is producing oil.

Capital spending that has already been incurred is a “sunk cost.” The cost of producing crude at a particular well might be $60 a barrel, but if the company spent half that money upfront, it might as well spend the other $30 a barrel to recover the oil if it can sell it for $45 a barrel-$50 a barrel.

Thus, investment in new projects drops off quickly when oil prices fall, but there is a significant lag before production starts to fall. Indeed, many drillers are desperate for cash flow and want to squeeze every ounce of oil out of their existing fields. Rail operator CSX recently confirmed that it expects crude-by-rail shipments from North Dakota to remain steady or even rise in 2015.

Indeed, during the week ending Jan. 9, U.S. oil production hit a new multi-decade high of 9.19 million bpd. By contrast, last June — when the price of crude was more than twice as high — U.S. oil production was less than 8.5 million bpd.

One final collapse?

In the long run — barring an unexpected intervention by OPEC — oil prices will stabilize around the marginal long-run cost of production (including the cost of capital spending). This level is almost certainly higher than the current price, but well below the $100 a barrel level that’s been common since 2011.

However, things could get worse for the oil industry before they get better. U.S. inventories of oil and refined products have been rising by about 10 million barrels a week recently. The global supply demand balance isn’t expected to improve until Q3, and it could worsen again in the first half of 2016 due to the typical seasonal drop in demand.

As a result, global oil storage capacity could become tight. Last month, the IEA found that U.S. petroleum storage capacity was only 60% full, but commercial crude oil inventory was at 75% of storage capacity.

This percentage could rise quickly when refiners begin to cut output in Q2 for the seasonal switch to summer gasoline blends. Traders have even begun booking supertankers as floating oil storage facilities, aiming to buy crude on the cheap today and sell it at a higher price this summer or next year.

If oil storage capacity becomes scarce later this year, oil prices will have to fall even further so that some existing oil fields become cash flow negative. That’s the only way to ensure an immediate drop in production (as opposed to a reduction in investment, which gradually impacts production).

Any such drop in oil prices will be a short-term phenomenon. At today’s prices, oil investment will not be sufficient to keep output up in 2016. Thus, T. Boone Pickens is probably right that oil prices will recover in the next 12 months-18 months, even if his prediction of $100 oil is too aggressive. But with oil storage capacity becoming scarcer by the day, it’s still too early to call a bottom for oil.

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