Economic Forecasts

Rising Production Helping to Keep Fuel Prices in Check

Energy costs should be relatively easy on your wallet in 2014.

This year figures to be fairly calm for energy prices, with fewer sharp swings than consumers and businesses endured in 2013. Rising output of domestic crude oil and natural gas, and reduced tensions in the energy-rich Middle East, will combine to keep energy markets well supplied throughout the year.

In fact, motorists can look forward to a bit of a break on prices at the gas pump.

After spiking this past summer on fears that the Syrian civil war might draw in the U.S., the price of oil looks set to retreat slightly, taking gasoline and diesel costs with it. Improved drilling techniques have already boosted U.S. crude output by 60% since 2008, and the boom will continue this year.

2014 could be the year the U.S. surpasses Saudi Arabia and Russia to become the world’s top oil producer, says Phil Flynn, an energy analyst with the Price Futures Group.

What’s more, the flood of new oil being tapped in the U.S.—plus rising output in Canada—is coming at the same time the pace of growth in global oil consumption appears to be moderating. The International Energy Agency, which tracks global energy trends, expects the gap between daily oil demand and available supplies to widen next year, taking some pressure off prices.

Look for crude oil prices to ease by about $5 to $10 per barrel. Over the course of the year, expect West Texas Intermediate—the U.S. benchmark for crude—to average about $85 to $90 per barrel, compared with the $95 or so that crude has averaged since 2011.

As a result, prices of regular unleaded gasoline will trend down, too, averaging $3.40 per gallon in 2014, versus $3.51 in 2013. Diesel fuel will also edge a bit lower, to about $3.

Still, violence and political upheaval in several key oil producing countries bear watching. Michael Lynch, of Massachusetts-based Strategic Energy & Economic Research, says that Venezuela’s worsening economy and mounting political turmoil present the biggest geopolitical threat to his forecast for modestly lower oil prices in 2014, as instability in South America’s biggest oil producing nation raises risks to crude exports. He also cautions that the recent agreement between Western powers and Iran regarding Tehran shuttering its nuclear program—which has helped calm oil markets recently—is far from a done deal.

Meanwhile, the price of natural gas—which affects everything from petrochemical profit margins to home heating bills—is likely to keep rising, continuing a rebound that began last year. But the gains will be modest, thanks to continued steady growth in supply from wells in Texas, Pennsylvania and other states. The benchmark wellhead price for natural gas, which averaged about $3.75 per million British thermal units in 2013, figures to hit $4 or so for 2014, thanks to growing demand. An exceptionally cold winter could briefly send gas prices higher, but by spring, demand will cool off. And modestly higher prices will encourage energy firms to drill new wells, ensuring that natural gas output keeps rising.

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