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Moderately Higher Gas Prices Likely Next Year

January 3, 2017

Consumers will likely be paying slightly more to gas up their vehicles and heat their homes in 2017, says Purdue University energy economist Wally Tyner.

The price of gasoline is expected to rise after members of the Organization of Petroleum Exporting Countries agreed to cut crude oil production by more than a million barrels per day in 2017. Total global production is about 96 million barrels per day.

“A cut of 1.5 million barrels may seem small compared with the total, but the world oil market normally is quite tight with supply and demand being about equal, so a cut of that size would mean some increase in crude oil prices,” Tyner said.

The size and duration of the price increase will depend on whether OPEC members follow through on the agreed production cuts and whether non-OPEC members such as Russia curtail production as well, he added.

“History suggests that it will be difficult to sustain the cut for all of 2017,” Tyner said. “It should be relatively easy for the first quarter because demand and production are normally lower. The real question will be sustaining the cut through the peak driving season next summer. Time will tell.”

If oil prices rise too quickly, non-OPEC producers could reenter the market, driving prices back down, Tyner said. The benchmark oil contract for February delivery was selling for $54.78 a barrel Thursday (Dec. 22).

“The problem for the cartel is that if crude oil gets much above $60 per barrel, that will bring back the oil shale rigs in the U.S. and production could increase fairly quickly,” he said. “In fact, rig counts are already rising with the recent uptick in prices.”

Based on current market conditions, Tyner expects gasoline prices to range from $2.25 to $2.55 per gallon next year – somewhat higher than 2016, but not nearly as steep as 2014, when the national average was $3.71 per gallon.

He foresees similarly moderate price hikes for natural gas, with home heating prices expected to rise about 10 percent next year.

Tyner noted four major trends that are impacting the U.S. natural gas market:

  • Increased natural gas use to generate electric power.
  • Slowed production due to lower prices.
  • Increased natural gas exports to Mexico.
  • Exports of natural gas in the form of liquids.

These factors combined with harsher winter weather could increase the cost of heating a home next year.

“The 2015-16 winter was relatively warm and natural gas was very low in cost,” Tyner said. “The 2016-17 winter likely will be colder and natural gas will cost more. Some companies will have purchased their gas earlier in 2016 when it was inexpensive, but later in 2017 the delivered natural gas price will be higher.”

Source: Purdue University