FUELING YOUR MIND FOR THE ROAD AHEAD
FUELING YOUR MIND FOR THE ADVENTURES AHEAD
FUELING YOUR MIND FOR THE ADVENTURES AHEAD

Why 2020’s Low Oil Prices Won’t Last Forever 

October 19, 2020 by Trucks.com, @trucksdotcom

Editor’s note: Written by Aaron Terrazas, director of economic research at Convoy, a digital freight network. This is one in a series of periodic guest columns by industry thought leaders.

This year has been full of surprises for the U.S. economy, but the price of oil held steady over the past few months.

After dropping by about 20 percent from January to May, the average nationwide retail diesel price has hardly budged, hovering between $2.38 and $2.42 per gallon — the bottom decile of its range over the past decade.

These trends make sense. As a result of the Covid-19 pandemic, about one-quarter of U.S. workers are now working from home. Many more are unemployed or newly out of the labor force. Air travel is running around half its pre-crisis traffic. Together, these three shifts erased about 2 million barrels per day from U.S. oil demand, close to 10 percent.

This should continue well into next year. As of mid-October, futures markets expect the spot price of West Texas Intermediate (WTI) crude oil to increase by 3 percent to 5 percent by the end of 2021. If historic patterns hold, this would barely register in retail diesel prices.

Oil supply was slow to shut down after demand evaporated during the early days of the pandemic, resulting in the bizarre mid-April phenomenon when financial markets briefly priced crude oil below zero due to the cost of storage. But it has more than caught up. According to the most recent Baker Hughes Rig Count, the number of active rigs in the United States is currently around 270, compared to nearly 1,000 a year ago. Total domestic crude production is about 80 percent of where it stood pre-crisis. Cuts to domestic production have been anywhere from 2.5x to 3x the decline in demand.

But any oil market watcher knows that periods of stability tend to end in sudden shocks. Oil prices could rise sharply in 2021 due to two converging trends: A strong rebound in oil-importing emerging economies, and structurally higher capital costs for U.S. domestic production.

Historically, oil prices are more volatile when there is a greater reliance on imports. The boom in U.S. domestic oil production over the past decade has been accompanied by moderation in retail diesel prices. In prior decades, this volatility was largely the result of geopolitical supply shocks — political uncertainty or violence in oil-producing parts of the world that quickly spilled over into international oil markets.

More recently, demand is also playing a role. The rapid growth of Asian economies that do not have domestic oil reserves, means that booms in these countries spill directly into oil markets. By most accounts, the Chinese economy is rebounding swiftly from the pandemic. If China’s recovery sustains through the winter, it could put upward pressure on international oil prices.

Beyond the international context, it’s possible that U.S. oil output could be sluggish to recover even as prices rise. The breakeven price for much of U.S. domestic oil production is roughly $40-$50 per barrel, according to the Federal Reserve Bank of Dallas. But that breakeven price has trended higher and it could experience a shift upward if there are post-election regulatory changes or if investors become more averse to environmentally sensitive investments.

So how high could prices get? Since the initial wave of euphoria around U.S. domestic oil production ended in 2014, WTI crude prices have held below $75 per barrel and retail diesel prices topped out under $3.40 per gallon. If WTI crude prices were to spike to $65 per barrel, roughly where they were in mid-2018, it would imply retail diesel prices around $3.20 per gallon — 80 cents higher than its current level.

Higher diesel prices mean that operating inefficiencies are even more costly. Every professional who drove during periods when fuel prices were regularly more volatile has their own time-tested strategies, but some common practices include:

  • Learn fuel-efficient driving techniques. Among owner-operators surveyed by Convoy in September 2020, only 15 percent had completed a fuel-efficient driving training. Eco-driving techniques — such as those taught in the SmartDriver program that Convoy recently launched with Natural Resources Canada — can improve fuel economy by 0.3 to 1 mile per gallon. At next year’s expected retail diesel prices, that could mean anywhere from $2,500 to $8,000 in annual fuel savings.
  • Reduce deadhead. The trucking industry has renewed its focus on reducing deadhead miles in recent years. But by most accounts, these efforts slipped with the supply chain disruptions of 2020. It’s difficult to find the most efficient load batches when shippers can barely plan their own schedules more than a few days ahead. More stable supply chains next year should allow the industry to again focus on reducing deadhead.
  • Invest in equipment upgrades. The difference between the fuel economy of an older truck and a newer-model truck can be 3-4 miles per gallon and fuel economy is a leading priority for truck buyers: 75 percent of owner-operators surveyed by Convoy said that fuel economy is a “very important” consideration when buying a new truck; among those who said that they plan to buy in the next year, 88 percent said fuel economy is “very important.”

The economy has responded to unprecedented uncertainty in 2020 and it’s impossible to plan for everything that might happen in the future. Sooner or later oil prices will rise — even if there is debate over the magnitude and timing. Truckers can prepare today for when that moment arrives.

Editor’s note: Aaron Terrazas is Director of Economic Research at Convoy, the most efficient digital freight network. He was previously an economist at Zillow and at the U.S. Treasury Department.

Trucks.com welcomes divergent thoughts and opinions on transport technology and trucking industry issues. Use the comments section to cite yours. Qualified opinion leaders are welcome to offer suggestions for opinion columns. Contact info@trucks.com.

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