After weeks of steady increases, oil prices are falling, leaving U.S. consumers wondering what the volatility means for their wallets. According to Ed Hirs, Energy Fellow and economics professor at the University of Houston, the recent drop is largely driven by market confidence that tensions in the Middle East will not escalate further.
“The market seems to think that peace is going to break out,” Hirs told Erie News Now, referring to a roughly 12 percent drop in crude prices over the last 7 days.
What triggered the sudden pullback? Traders appear to be pricing in a diplomatic breakthrough. Hirs pointed to the newly agreed peace deal as a key reason for stabilizing prices and warned how much worse things could have gotten if the conflict had escalated.
“There was a 'war premium,' and the price (of oil) got up to nearly 78 dollars a barrel,” Hirs said. “If the Strait of Hormuz had been even partially blocked, taking 8 to 10 million barrels off the market, we might’ve seen oil prices double very easily.”
While peace prospects have eased global price volatility for now, domestic production is unlikely to ramp up. U.S. oil and gas companies tend to slow drilling when prices dip below their breakeven thresholds – the minimum needed to make new wells economically viable.
“As long as the price of oil stays below 70 dollars a barrel, we’re going to see diminished activity in the U.S. oil patch,” Hirs said.
Still, he noted that this slowdown in production is unlikely to drive gas prices back up.
“I think for the bulk of the summer, we’re going to see much lower prices at the pump.”