Some experts speculated that the United Steelworkers strike, the largest oil refinery strike in over three decades, would send gas prices upward. But after six weeks, the strike is essentially over and gas prices are set to fall again.
Right before the strike ended, Fitch Analytics released a report saying that the strikes could send gas prices upward if they continued. Other experts said that the strike’s timing, during seasonal repairs to refineries that reduce capacity and the time when refineries switch from winter to summer blend, could intensify the strike’s potential impact on gas prices.
But on March 12, United Steelworkers reached a tentative agreement with Royal Shell Co., which is representing the oil industry. Eight refineries are still ironing out the details of the settlement, but most workers have returned to work.
“Our main concern and the driving factor of this strike has been safety, safety for the workers” said United Steelworkers spokeswoman Lynda Hancock.
Workers were concerned that they were being overworked and requested more employees be hired to help meet high work demands. The union also called for more machinery repair and factory maintenance.
Safety demands seem to have been met, though both parties have remained quiet about the details.
With some 6,500 workers off the job, the strike could have sent prices upward. But most refineries hired temporary non-union workers to soften the impact of the strike.
“Demand from refineries for oil was not significantly impacted by the strike because non-unionized workers, engineers and managers, were repurposed to keep day to day operations running,” said Michael Brisson of Moody’s Analytics.
The strike had little impact on steadily decreasing gas prices. The average price of gas fell 4 cents over the past two weeks, falling to $2.50 a gallon, according to the most recent Lundenburg survey.
Here’s why gas prices will continue to drop.
The cost of crude oil, the biggest indicator of gas prices, is approximately $46 a barrel. This is the cheapest crude oil has been in six years. WTI crude oil futures are down $3.09 from last week, coming in at $43.96 a barrel.
“The refinery strike made it harder to turn crude oil into refined products like gasoline but did not change the fundamental fact that there is more crude oil being produced than is being used by refineries,” said James Hamilton, Professor of Economics at University of California, San Diego.
U.S. oil production shows no signs of slowing, and when production of oil goes up, gas prices usually go down.
In February, commercial crude oil refineries had the most days of supply since 1985, according to the U.S. Energy Information Administration (EIA).
Crude oil production is up 9.6 million barrels from a week earlier, or 82.7 million barrels from a year prior. Domestic oil production is forecasted to increase, according to the EIA.
The downward pressure that high domestic oil production is having on gas prices is compounded by the fact that there is weak demand. In other words, demand for oil is not keeping up with the glut in oil production.
As a result, onshore oil storage is reaching capacity, meaning that in a few months, there many not be anywhere to store all the oil we have. When this happens, there could be an overflow of oil in the market, sending prices even further down.
“Both weak global demand and strong global supplies have been putting downward pressure on prices for most of the year so far,” said Kenneth Christianson, professor of economics at Binghamton University and former member of United Steelworkers.
The strength of the U.S. dollar, which doesn’t show signs of weakening, will also lower oil and gas prices. The greenback and the price of oil are inversely related.
A stronger dollar means that it will take more of another currency to purchase the same amount of oil. This decrease in purchasing power will decrease the demand for oil. As a result, the price will decrease.
These factors – increased production, weak demand, nearing oil storage capacity and a strong dollar – translate into low gas prices for the coming months.
While the happy consumer will continue to save money at the pump, the downward trend could have negative impacts on oil and gas related industry domestically as well as economies around the globe that rely on oil exports.
[By Marguerite Ward, Originally published on CUNY on the Economy, March 23, 2015]
Photo courtesy of Mike Mozart via Flickr