The first part of that headline comes from highly regarded website OilPrice.com. The forecast is based on one made by Citigroup energy analysts. Crude oil prices could drop to $5 a barrel because of the collision of Saudi-Russian production/price battle and an almost certain crater of global demand that already has started. Oil prices were over $50 a barrel as recently as the final week in February.
The last time the annual average price of crude was under $5 for a year was in 1973, 47 years ago. The United States had begun to rely on production from the Organization of the Petroleum Exporting Countries (OPEC). Then, America sided with Israel in the 1973 Arab-Israeli War. OPEC completely cut off the U.S. supply. The price of oil raced above $12 in less than two years. It nearly shattered the American economy.
This year is nearly the opposite. Oil is plentiful, at the highest level in history. Russia and Saudi Arabia have begun to ship oil from their vast reserves as quickly as they can. Fundamentally, the two countries want to push the other out of the energy business by taking prices so low that losses will be unsustainable. Because of their reserves and production capacity, the vicious competition could go on for months. At the same time, America has built production to a level that is above the country’s demand. This is due to the rise of shale oil production. Ironically, many of these producers that pushed supply higher will go out of business because of Russia and Saudi Arabia.
Many countries around the world have hoped oil prices would go much lower. They depend on imports for most of their crude. Now, as they get their wish, it is in part because their economies will enter a very deep recession. This, in turn, will take more demand out of the market.
Because of this confluence of factors, gasoline in the United States may fall below $1 a gallon. The question is, how many people will be on the roads as the nation enters a lockdown?
Demand will sharply drop around the world, at least until well into summer. Oil supplies will sit in refineries and in supertankers. Eventually, there will be fewer and fewer places to store it. The industry has not figured out a solution to that burgeoning problem.
The price of gas already has begun to fall rapidly. In the United States, where gas prices have been around $2.50 for a gallon of regular for well over a year, they have fallen well below $2 in some states. One gas station started to offer $0.99 gas, according to GasBuddy. As shocking as it seems, the price of gas could drop near $1 across most of the nation.
The notion that oil would ever reset to under $5 was absurd only weeks ago. The world has changed enough so that the forecast is believable.