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 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.

TIME Saudi Arabia

King Abdullah’s Death Shows Saudi Arabia’s Declining Clout

King Abdullah, left, with then-Crown Prince Salman, right, in 2010.
King Abdullah, left, with then-Crown Prince Salman, right, in 2010. AP

The death of Saudi Arabia’s King Abdullah has momentarily grabbed the world’s attention, but the real story is that his kingdom matters less than it used to

Ten years ago, the death of a Saudi king would have sent shock waves through Washington. Today, as the Kingdom recovers from the death of King Abdullah yesterday, Saudis don’t carry the same clout. In part, that’s because the U.S. is much less dependent on Middle Eastern oil than it was a few years ago, as U.S. companies have reinvented the way oil and natural gas is produced. Hydraulic fracturing has opened access to liquid energy deposits locked inside once-impenetrable rock formations, and breakthroughs in horizontal drilling methods have made the technology more profitable.

By the end of this decade, the United States is expected to produce almost half the crude oil it consumes. More than 80% of its oil will come from North or South America. By 2020, the United States could become the world’s largest oil producer, and by 2035 the country could be almost entirely self-sufficient in energy. Relations with the Saudis are no longer a crucial feature of U.S. foreign policy, and the surge in global supply, which has helped force oil prices lower in recent months, ensures that others are less concerned with the Saudis as well.

In addition, outsiders are not worried that King Abdullah’s death will make the Kingdom unstable. Newly-crowned King Salman is plenty popular, and other key players—Crown Prince Muqrin, National Guard head Prince Miteab, and Interior Minister Mohammed bin Nayef—have pragmatic working relations with the new king and with one another. The succession process will appear uneventful from the outside, but Salman will spend the next several months consolidating his authority and building a stable balance of power among factions within the family and across the government.

Another reason the Saudis matter less: They’re now bogged down in the region. Saudi worries that Iran can make mischief even under harsh sanctions only raises fears should a deal be made with the West later this year over its nuclear program, which would ease those sanctions, Tehran would only become a more troublesome rival. But even if there is no deal and sanctions are tightened, Iran will probably become more aggressive to demonstrate its defiance, creating new headaches along Saudi borders.

How will the Saudis manage its local security worries? Along the border with violence-plagued Iraq, the Saudis are actually building a 600-mile wall complete with five layers of fencing, watch towers, night-vision cameras and radar. Terrorist violence in neighboring Yemen and the fall of its government this week add to the Saudi’s sense that their country is under siege. They’re building a wall along Yemen’ s border as well. Fights with ISIS and al-Qaeda in the Arabian Peninsula will demand attention and money.

King Salman is 79, and he’s been central to Saudi policymaking for 50 years. One day soon, we’ll see generational change in the Saudi leadership. When that happens, we might see a fresh approach to the Kingdom’s two biggest problems: Its inability to build a dynamic, modern economy to harness the energies of Saudi Arabia’s millions of young people and its growing marginalization as an international political and economic force.

That day has not yet come.

Foreign-affairs columnist Bremmer is the president of Eurasia Group, a political-risk consultancy. His next book, Superpower: Three Choices for America’s Role in the World, will be published in May

TIME energy

Oil Prices Spike After Saudi King’s Death

King Abdullah waves as he arrives to open a conference in Riyadh.
King Abdullah waves as he arrives to open a conference in Riyadh on Feb. 5, 2005 Zainal Abd Halim—Reuters

Last month, Saudi Arabia pumped 9.5 million oil barrels a day, but uncertainty clouds the future of oil prices

Oil prices spiked following the death on Friday of Saudi Arabia’s King Abdullah, whose country’s oil production is the largest of any state in the 12-member Organization of Petroleum Exporting Countries (OPEC), a cartel responsible for approximately 40% of the global oil supply.

The monarch’s passing also increased oil futures in New York by 3.1 and London by 2.6, according to Bloomberg. As the globe’s biggest exporter of crude oil, Saudi Arabia helped maintain an OPEC production quota last year that helped keep oil prices low by ensuring a high supply of crude in the worldwide market. Prices nearly halved last year when OPEC’s output did not drop to reflect oversupply, as the U.S., the globe’s largest consumer of oil, pumped more oil than it had in over three decades.

“The passing of King Abdullah is going to increase uncertainty and increase volatility in oil prices in the near term,” said financial analyst Neil Beveridge in a phone interview with Bloomberg.

U.S. crude stockpiles jumped by 10.1 million barrels, its largest volume increase since early 2001, according to the Energy Information Administration’s reports up to Jan. 16.

Crown Prince Salman bin Abdulaziz succeeds King Abdullah, who helmed the kingdom for nearly a decade and significantly enlarged Saudi Arabia’s economy, which is now the largest in the Arab world in terms of total GDP.

[Bloomberg]

MONEY The Economy

Why These 5 Companies Are Laying Off Thousands of Workers

eBay Inc. office building, San Jose, California.
Kristoffer Tripplaar—Sipa USA

The economy is on the mend. Unemployment rates are down. So what's up with all these companies slashing jobs by the thousands?

Here’s some explanation—note we used the word “explanation” not “justification”—for why a handful of companies are laying off large chunks of their workforces even as the economy is on the upswing and unemployment is falling month after month.

eBay: 2,400 jobs
On Wednesday, eBay announced it would be cutting 2,400 jobs in the first quarter of 2015. The company says that the layoff figure includes positions that are unfilled, so the actual number of people losing their jobs will be less than 2,400. What’s more, eBay points out that the figure represents only 7% of the company’s total workforce. (Are we the only ones surprised to hear that eBay currently employs 34,600 people?)

Among the factors influencing the layoff decision: “Weak holiday sales” and revenues that have been lower than analysts expected, as well as a company restructuring in anticipation of the spinoff of eBay’s online payment service PayPal. The company said it may also spin off a third division, eBay Enterprises, which runs e-commerce operations for other companies, explaining in a statement: “It has become clear that [eBay Enterprise] has limited synergies with either business, and a separation will allow both to focus exclusively on their core markets.”

As for weak sales, one reason eBay is suffering is that, unlike Amazon—which effectively uses its Amazon Prime membership program to create legions of shoppers who make the vast majority of their purchases at its site—many eBay customers use the site randomly and haphazardly rather than habitually. “It’s the infrequent shopper that comes two, three, four times a year,” eBay CEO Donahoe told USA Today. “They didn’t come back at the rate we thought.”

American Express: 4,000 jobs
During the course of 2015, AmEx plans on cutting costs by trimming 4,000 jobs after failing to meet long-term revenue growth target of 8%. The Wall Street Journal pointed to “a stronger dollar, a weak December for retail sales and the sharp drop in gas prices” as forces that hurt the company’s fourth quarter results—which actually showed revenue and profits increasing, just not enough to satisfy investors. The 4,000 layoffs represent 6% of AmEx’s total workforce of roughly 63,000.

Baker Hughes & Halliburton: 8,000 jobs
The two energy companies agreed to merge last autumn, and both ended the year strongly, with Halliburton posting revenues up nearly 15% and Baker Hughes achieving record revenues for the quarter. Nonetheless, in light of plunging crude oil and gas prices, oilfield services provider Baker Hughes announced plans for layoffs of 11% of its workforce, roughly 7,000 employees, while Halliburton plans for about 1,000 job cuts of its own.

“This is really the crappy part of the job, and this is what I hate about this industry frankly,” Baker Hughes CEO Martin Craighead said this week in a conference call with analysts. “This is the industry, and it’s throwing us another one of these downturns, and we’re going to be good stewards of our business and do the right thing. But these are never decisions that are done mechanically.”

Schlumberger: 9,000 jobs
Another oilfield services company, Schlumberger also reported surprisingly strong fourth quarter results despite the steep drop in oil and gas prices—and it too recently announced big-time layoffs. Last week, the company said it had laid off 9,000 employees worldwide in late 2014 as profits fell and demand for oil retreated.

Read next: Here’s What You Really Need to Advance Your Career

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TIME Economy

See the State With the Cheapest Gas in the U.S.

Gas prices in Missouri plummeted to $1.58 in January

At first look, the collapse in oil prices over the past year, from $107 per barrel in June to below $50 a barrel today, seems like the proverbial free lunch for American consumers. The decline in prices is the equivalent of a $125 billion tax cut. And it’s effectively a progressive one, since the biggest beneficiaries will be working- and middle-class people who spend a disproportionate amount of their income on gas for their cars and heating fuel for their homes. American households with oil heat could save $767 each this winter. That cash can now be spent on a new car—or a washing machine, an electronic gadget, clothes or a few dinners out.

That should boost spending, and …

Read the full story, which appears in the Feb. 2, 2015 issue of TIME, here.

TIME Economy

Expect Talk of Oil, Terrorism and Sex Scandals at Davos

A logo sits on a glass panel inside the venue of the World Economic Forum (WEF) in Davos, Switzerland on Jan. 19, 2015.
A logo sits on a glass panel inside the venue of the World Economic Forum (WEF) in Davos, Switzerland on Jan. 19, 2015. Chris Ratcliffe/Bloomberg—Getty Images

Even the most powerful cannot completely control the agenda at the World Economic Forum in Davos. Here’s what you can expect from this year’s conclave of the elite

Even the powerful men of Davos can’t control their own agenda.

The CEOs, top academics, and world leaders—many of whom have traveled by private jet and then helicopter to Davos, a secluded Swiss ski town—for this year’s World Economic Forum have come officially to discuss how power in the global economy is shifting, from traditional leaders like the U.S. to the emerging markets.

Instead, on the eve of the conference, which officially kicks off on Tuesday night, there were signs that the economic order of the past few decades seems intact. The latest sign came on Monday, when Chinese stocks plunged 8%, their largest drop in six years. Meanwhile, Brazil’s economy is stagnant and the collapse in oil prices has pushed Russia into a crippling recession. At the same time, U.S. GDP rose 5% in the third quarter, once again making the nation the driver of the world’s economy. That’s likely to lead much of the talk in Davos this year.

And while the monied men—and they are, once again, mostly men—have come to talk economics and global policy, at least some of that high-minded fare will be overshadowed by more salacious talk. The U.K.’s Prince Andrew, who is attending the World Economic Forum this year, is likely to get hit with questions about a scandal with an American woman, who claims he used her as a sex slave when she was 17. It will be the first time Prince Andrew has been in public since the allegations were made.

The World Economic Forum’s official agenda often gets pushed aside by world events that unfold while the powerful are walled in by Davos’ peaks. But it has been six years since leaders in Davos were meeting in the midst of what looks to be growing economic turmoil. And it’s the first time in a while where at least a portion of that instability is coming from the conference’s home turf.

European leaders will be speaking on the eve, once again, of a vote in Greece that could break up the euro. That and the plunging price of oil threaten to hurl the world’s financial system back into tumult.

Officially, the title of this year’s World Economic Forum is “The New Global Context.” The economic context that has emerged in the past few months is one of cheaper oil and instability in economies in Russia, Europe, and, most recently, China. That’s likely to make oil the spotlight of any discussion at Davos. On Wednesday, the secretary-general of the Organization of Petroleum Exporting Countries (OPEC) Salem Adballa El Badri will speak on a panel with Arkady Dvorkovich, deputy prime minister of Russia. Also on the panel will be Khalid Al Falih, the CEO of Saudi Aramco, the Saudi Arabian oil company. The discussion will likely focus on whether the drop in oil prices is supply-driven, a gambit by Saudi Arabia and other nations to drive out other higher cost oil suppliers, or if it’s a sign that the world economy is slowing more dramatically than it may initially seem.

Central bankers around the world should expect some criticism, and that includes those in Switzerland, who last week surprised the world, causing currencies around the world to tumble compared to the Swiss franc. On Wednesday morning, New York University Professor Nouriel Roubini and hedge funder Paul Singer, both of whom have criticized the Federal Reserve for keeping interest rates near zero for so long, will talk. This summer, Singer said that the rise in the U.S. markets was based on fake money from the Fed and that it was not sustainable.

Davos is known for its high-powered panel discussions. The highest wattage finance conversation will come on Thursday and will likely focus on what could happen when the Fed begins to raise interest rates. That panel will include Goldman Sachs Chief Operating Officer Gary Cohn; Ray Dalio, who manages the largest hedge fund in the world; Harvard professor and former Treasury Secretary Larry Summers; and Christine Lagarde, who is head of the International Monetary Fund.

On Thursday afternoon, Microsoft CEO Satya Nedella will debate the future of tech with Facebook’s Sheryl Sandberg and Google’s Eric Schmidt. Also talking will be Yahoo’s Marissa Mayer. But perhaps the hottest tech ticket at Davos, given the state of China’s economy, is to hear Alibaba’s CEO Jack Ma, who will be speaking Friday morning. In September, the Chinese online retail giant raised $26 billion on the New York Stock Exchange, in the biggest IPO in U.S. history.

Income inequality is a perennial topic at the World Economic Forum. But the discussion of inequality at Davos tends to be impersonal and focus on rich nations versus poor nations. But influential research group Oxfam has attempted to make the issue more personal this year. On Monday, the charity Oxfam released a report targeted at the World Economic Forum that said the world’s wealthiest 1% are close to owning as much wealth as the rest of the globe combined. Davos gets its share of that 1%. Also, President Obama’s State of the Union Address on Tuesday will likely focus on income inequality, which could make it a larger part of the discussion at Davos.

Also, given the recent attacks in Paris, terrorism is likely to be a topic of conversation in Davos. French President Francois Hollande will address the conference on Friday.

U.S. officials have been somewhat absent in recent years at Davos, but they are slated to return this year. Secretary of State John Kerry, who was criticized for not participating in demonstrations against terrorism in France, will address the conference on Friday. U.S. Treasury Secretary Jack Lew is also slated to be at Davos, but he is not scheduled to publicly address conference attendees. Other U.S. officials or politicians on the attendance list include Penny Pritzker, the Secretary of Commerce; and Darrell Issa, the congressman from California. Former U.S. House of Representatives Majority Leader Eric Cantor will also be at Davos, but this year as an investment banker, for boutique firm Moelis & Co.

For the first time, the World Economic Forum will hold a discussion of gay and lesbian rights on its official program. But likely to get as much buzz as the panel is the fact that it won’t take place until Saturday, when many of the conference’s rich and powerful have already decamped or have headed to the ski slopes.

So it goes in Davos.

This article originally appeared on Fortune.com.

MONEY Economy

The Doom and Gloom of Deflation Hasn’t Reached Our Shores—Yet

Cars fill up at the pumps at a Shell station near downtown Detroit, where the sign shows the price at $1.899 a gallon on Thursday, Jan. 1, 2015
Cars fill up at the pumps at a Shell station near downtown Detroit, where the sign shows the price at $1.899 a gallon on Thursday, Jan. 1, 2015. AAA Michigan said that the average cost of self-serve unleaded gasoline in the state was $1.97 a gallon, the first time the price has fallen below $2 a gallon since March 2009 and down 9 cents since the beginning of the week. David N. Goodman—AP

A new government report shows that prices are clearly falling, mostly due to sinking energy prices. Even so, this could keep the Fed from hiking rates for months.

You might think that falling consumer prices would be met with cheers on Wall Street, especially in the all-important holiday shopping season.

But when a new government report released on Friday showed that consumer prices in December had declined by the largest amount in six years, there was a bit of a gasp on Wall Street.

The Labor Department reported that the Consumer Price Index, perhaps the most widely followed measure of U.S. inflation, sank 0.4% in December, after dropping 0.3% in November.

This data clearly shows there is no inflation in this economy.

Yet it’s still too soon to say if there’s deflation — a quagmire that Europe is currently stuck in, where prices keep falling to the point where consumers postpone purchases, further weakening the economy.

Why?

For starters, over the past 12 months, prices in general have inched up 0.8%. While that’s the lowest yearly rate since 2009, it’s still positive.

More importantly, plummeting gasoline prices were the real culprit that drove CPI down in December and November, notes Michael Montgomery, U.S. economist for I.H.S. In fact, last month’s 9.4% decline in gas prices accounted for the entirety of the 0.4% decline in CPI, he said.

And keep in mind that several key categories of spending did rise in December, including food, electricity, and housing costs.

Overall, so-called core CPI — which strips out volatile energy and food costs — was flat last month and rose 0.1% in November.

This helps explains why Americans regard falling prices as a blessing so far — not a curse.

Consumer confidence, as measured by the University of Michigan’s consumer sentiment index, jumped to a reading of 98.2 this month, the highest point since January 2004.

But economists expect the deflation concerns to linger, as gas prices have sunk even faster this month than in December.

Already, there’s talk that the Federal Reserve might hold off raising interest rates this year because the global slowdown in general and Europe’s deflation specifically are keeping inflation at bay here at home.

This chatter—and concern—will grow if January’s CPI figures show even more falling prices.

TIME Innovation

Five Best Ideas of the Day: January 16

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

1. A simple plan pairing a low-income first-time mom with a nurse for advice through pregnancy and her child’s early years can give that family stability and even a better life.

By Nancy Cook in the Atlantic

2. Google will pilot test a build-your-own modular smartphone, operating out of a mobile phone-lab that looks like a food truck.

By Nathan Ingraham and Josh Lowensohn in the Verge

3. The belief that some scientific fields require innate genius or natural ‘brilliance’ may keep women out.

By Rachel Bernstein in Science Magazine

4. The FDA has cleared a ‘pacemaker for the stomach’ that could be a silver bullet against obesity.

By Thomas M. Burton in the Wall Street Journal

5. Offshore wind farms — if we can build them — stand to provide twice as much energy and create twice as many jobs as offshore drilling.

By Lindsay Abrams in Salon

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

TIME Ideas hosts the world's leading voices, providing commentary and expertise on the most compelling events in news, society, and culture. We welcome outside contributions. To submit a piece, email ideas@time.com.

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