Why Gasoline Could Be Cheap for Years to Come

Gas Prices
Gene J. Puskar/AP
A year ago, oil prices plunged from over $100 a barrel to a low of less than $50. Now, after hovering around $60 a barrel for a couple of months, prices again fell to around $50 a barrel in mid-July, and there are emerging signs that cheap oil is here to stay.

For drivers across the U.S., that's great news because it means gasoline prices are falling as well. Gas as low as $2.25 can be found in South Carolina, and if the price of oil continues to fall, we could break the $2-a-gallon barrier once again. Here are the three biggest reasons to think gas prices won't spike anytime soon.

Maybe a Nuclear Deal With Iran Isn't a Bad Thing?

On July 14, the U.S. and five other nations agreed to lift sanctions on Iran in return for limitations on the country's nuclear program. For energy markets -- and your wallet -- that's a huge deal.

Iran holds the fourth-largest reserves of oil in the world, and in the late 1970s it produced as much as 5.5 million barrels of oil a day. Since then, sanctions and underinvestment have crushed the country's energy sector, and in 2014 it produced just 2.8 million barrels of oil a day -- but that amount could rise quickly. As recently as 2011, Iran's production was 3.7 million barrels of oil a day; lifting sanctions could increase oil production again, significantly, flooding the market with oil.

A few hundred thousand barrels of oil in additional supply can have a big impact on oil prices, so if Iran adds a million barrels or more of oil to the market over the next few years, as it plans to, now that sanctions are being lifted we could see supply pressure on oil prices for a long time.

The U.S. Isn't Giving Up on Shale Drilling

Another supply challenge to watch is shale drilling in the U.S. Despite the plunge in oil prices, drillers have been stubborn about cutting production. In fact, U.S. oil production is up nearly 1 million barrels a day (or 11.2 percent) since this time a year ago.

From a supply standpoint, that's putting more pressure on oil prices than Iran or OPEC's resistance to cutting supply. And with the number of rigs drilling for oil in the U.S. actually on the rise this summer, there could be an oversupply of oil for many years to come.

China's Economy Could Be Oil's Biggest Driver

The two biggest things that kept oil prices high over the past decade were increasing demand and periodic supply disruptions (think Iraq, Libya, Iran). I talked about supply additions above; on the demand side, China alone is responsible for about half of the increase in global oil demand over the past decade, so it's an incredibly important factor. If China's growth falters or more fuel-efficient vehicles become more popular in the region, there could be a dramatic impact on prices. And there are some signs that the Chinese economy may be ready to take a breather.

Commodity prices have plunged this year (which will hurt China's GDP), stock markets in China lost $3 trillion in value at one point this month, and real estate has actually been in decline there over the past year.

Among market watchers, there's a lot of concern that China is overstimulating its economy to keep growth high, and eventually a slowdown will be needed to sort the market out. If that happens, oil demand could stop growing, which would be bad for the oil industry -- but could be great for your wallet.

Cheap Gasoline Is Here to Stay

Add up all of these factors and you get a formula for cheap gas for a very long time. Given the trajectory oil is on, $2 a gallon at the pump isn't even out of reach before the summer is out.

I wouldn't go out and buy a gas-guzzler now, though, because low oil prices will eventually subside -- and you don't want to be stuck with a gas-guzzler if prices rise, even if that's not until a few years from now. For now, it's good to know that energy prices will remain low for the foreseeable future. You can thank the strange mix of factors above for that.

Travis Hoium is a Motley Fool contributor. Try any of our Foolish newsletter services free for 30 days. Check out our free report on one great stock to buy for 2015 and beyond.
Read Full Story
  • DJI29348.1050.500.17%
  • NIKKEI 22524083.5142.250.18%
    Hang Seng28795.91-260.51-0.90%
  • USD (PER EUR)1.110.00070.07%
    USD (PER CHF)1.03-0.0005-0.04%
    JPY (PER USD)110.170.01500.01%
    GBP (PER USD)1.30-0.0003-0.02%