Heavy snow and difficult travel expected again, heaviest snow in southern Minnesota

MPR News helps you turn down the noise and build shared understanding. Turn up your support for this public resource and keep trusted journalism accessible to all. 

Turn Up Your Support

President Donald Trump promised that during his presidency 

gasoline prices would drop and U.S. oil production would boom

Prices at the pump have indeed gone down, largely because the price of crude oil has dropped by nearly 25 percent since the start of January. West Texas Intermediate, the U.S. benchmark, dropped from a peak of around $80 a barrel in mid-January to just under $60 today.

But that's not because U.S. producers are 

. Indeed, prices are now low enough that, on average, U.S. producers cannot profitably drill new wells, according to the 

Here's a breakdown of the forces that are buffeting oil prices and what it means for individuals and the economy.

Tariffs are creating economic uncertainty 

Sweeping tariffs have raised concerns that trade barriers could slow down the global economy.

Oil demand is closely correlated with economic prosperity: When economies are booming, companies are opening factories, and people are buying things and going places, oil consumption climbs. When economies slump, so does oil demand.

And although environmentalists say that oil consumption must drop if the world is to meet climate goals, demand is still expected to rise this year — even with a trade war. The question is 

Analysts at Rystad Energy, a research company, have said that a trade war extending through 2025 could halve the expected growth in Chinese oil demand. Rystad's global head of oil commodity markets, Mukesh Sahdev, wrote that the tariff situation is so atypical that comparing this year to last year "has become largely irrelevant."

OPEC+ is putting more barrels on the market 

Meanwhile, while there are concerns about a drop in oil demand, production is actually set to rise.

The oil cartel OPEC and its allies, collectively known as OPEC+, have made a series of announcements over the last few months, each increasing the group's oil production. Most recently, on May 3, some members of the oil cartel that had previously volunteered to cut their production announced that they would unwind some of those cuts.

The news immediately sent the oil market downward; prices touched four-year lows Monday before recovering.

In a press release, OPEC+ emphasized that its decision is based on "current healthy market fundamentals" — essentially, pointing out that while fears about the future have led to falling oil prices, demand today remains unwavering.

Analysts think there's more than that going on. OPEC+ member countries agree to production quotas; when everyone sticks to them, it keeps supply limited and prices high. But 

 that some of the group's members have been exceeding those quotas. This is a recurring problem for OPEC+; each individual country has an incentive to produce more, even as the group as a whole benefits if they all produce less.

Before the most recent OPEC+ gathering, analysts at Clearview Energy Partners predicted in a note that Saudi Arabia, the de facto leader of OPEC+, could urge the group to increase production and bring down prices "in an effort to pressure OPEC+ member countries including Iraq and Kazakhstan to comply with quotas."

And indeed, the group did order a production increase.

Meanwhile, Trump has explicitly asked OPEC+ to produce more oil to bring down prices, although it's not clear what influence that may have had.

A boon to consumers and a blow to producers

Lower oil prices mean lower prices at the pump. Gasoline prices usually go up in the spring, but went down in April, and could fall further. That means more money in the pockets of American drivers.

Lower fuel prices also lower the prices of goods in general, because it makes shipping cheaper. Pantheon Macroeconomics estimates that recent drops in oil prices will bring headline consumer prices down by about 0.3 percent, relative to where they would be otherwise.

But Pantheon also estimates that this benefit will be canceled out — on a national level — by the hit to oil producers, who will cut spending and hiring, sending ripples through the economy.

The U.S. is the largest oil producer in the world. And while companies in the U.S. are not party to OPEC+ negotiations, they are very much affected by OPEC+ decisions.

The combination of tariffs and OPEC+ production hikes has brought prices low enough to hamper U.S. production. In fact, U.S. oil producer Diamondback 

 that "it is likely that U.S. onshore oil production has peaked and will begin to decline this quarter."

This runs counter to Trump's vision of an expanding U.S. oil industry, summed up by his oft-repeated phrase: "Drill, baby, drill."

That's a tension that's been at the heart of the president's energy policy all along. The low prices he's promised consumers and the boom he's promised oil companies are simply incompatible.

Business and Economic News

Politics and Government News

Transportation

Homepage

Camila Domonoske

Author

Between tariffs roiling the global economy and OPEC putting more barrels on the market, prices have dropped significantly since January. That's good for consumers, and bad for oil companies.

Why oil prices are falling and what it means for the economy

Go Deeper.

Like this?