IER: The Good and the Bad for U.S. Consumers and the Oil Industry

[Note: The Institute for Energy Research is a DC-based think tank dedicated to the promotion of sensible energy policies and maximization of U.S. energy security. The piece here was published on their site yesterday, and is something I think everyone should read and absorb.]

Key Takeaways

1 - The recent 15% drop in oil prices means consumers can expect lower gas prices this summer.

2 - However, it may spell trouble for U.S. oil producers who have worked hard to make the nation the world’s largest oil and gas producer.

3 - EIA has lowered its estimated price for WTI this year and next. Next year’s estimate falls below the “breakeven price” projections for the Permian Basin, the U.S.’s most prolific oil region.

4 - EIA’s estimate includes the impacts of OPEC+’s announced increased output scheduled to begin next month, as they begin to unwind production cutbacks OPEC+ has overseen for several years.

5 - EIA envisions gasoline prices averaging $3.10 per gallon nationwide this summer, 20 cents less than in its March estimate. Prices will be lower in many places because of expensive California gas due to the state’s self-inflicted policies affecting the average price.

6 - The resourcefulness and creativity of the U.S. oil industry, however, have repeatedly proven their mettle against the adversity of markets.

With the 15% drop in oil prices this month, consumers will be enjoying lower gasoline and diesel prices. Still, many oil producers, particularly shale oil producers in Texas, the largest oil-producing state, could be struggling to break even, which could lead to idled rigs and economic difficulties. West Texas Intermediate (WTI), the U.S. oil benchmark, is trading around $60 a barrel. The Energy Information Administration (EIA) is forecasting that WTI oil prices could average $63.88 per barrel in 2025 and $57.48 per barrel in 2026, 10% less than their previous forecast, due to output increases by OPEC and U.S. trade policies. Further, the EIA is forecasting a cut to 2025 global oil demand growth by 400,000 barrels per day to around 900,000 barrels per day and lowered its 2026 U.S. oil production estimate to 13.56 million barrels per day — a slight drop from its previous forecast. This is after U.S. oil exports averaged a record 4.1 million barrels per day last year, as increased flows to Europe, India, Singapore, and South Korea helped offset a sharp decline in Chinese demand.

EIA expects the U.S. retail price for regular grade gasoline to average about $3.10 per gallon this summer (April–September), about 20 cents per gallon less than its March estimate due to its lower oil price forecast. If oil prices drop to that level, gasoline prices will be the lowest inflation-adjusted summer average price since 2020. It is important to note that California’s high gasoline prices increase the average national price. California’s gas prices currently average around $4.90 a gallon due to its policies and high gasoline tax. According to Michael Mische of the University of Southern California’s Marshall School of Business, California’s strict regulations, which include environmental regulations that mandate a particular blend of gasoline that is not widely produced, its Cap-and-Trade Program, which led to prices rising rapidly beginning in 2015, its gasoline tax, which is the highest in the country, and refinery closures driven by other state policies are causing the higher prices.

Breakeven Prices for Oil Operators

Breakeven prices for oil operators, even in the Permian Basin, are between $61 per barrel and $62 per barrel to remain profitable when debt servicing and dividend payments are included. At less than $60 a barrel, as EIA is predicting for next year, many U.S. oil producers will struggle to turn a profit, especially in some of the country’s aging basins, forcing them to stop drilling potentially, idle drilling rigs, and let employees go. Besides the potential demand shock from the tariffs, there are fears that Saudi Arabia, one of the world’s lowest-cost producers, could want to increase market share by pumping more oil and allowing prices to go lower, forcing other producers out of business. With the cost of drill pipe increasing by 25%, oil prices need to go up to compensate, unless operators can find new ways to produce more for less.

OPEC+ Adds Production

OPEC+ announced plans to add 411,000 barrels a day to the market next month, “equivalent to three monthly increments,” based on their earlier plans. In early March, OPEC+ affirmed plans to gradually increase oil production beginning in April, ending a voluntary program of production cuts of 2.2 million barrels per day that it started almost two years ago to keep oil prices high to help cover country budgets.

Other Forecasts

Bank of America forecasts that the global trade war, which has heated up as China is retaliating with tariffs on U.S. goods of 125%, will cut oil demand growth in half this year to 450,000 barrels per day. Goldman Sachs lowered its 2025 price forecast for WTI oil by $4 to $58 per barrel and $62 per barrel for Brent oil. The bank projected that prices will continue to fall in 2026, with U.S. and Brent oil averaging $55 and $58 per barrel, respectively, throughout the year.

Conclusion

While consumers should benefit from gasoline prices coming down due to lower forecasted oil prices from OPEC+ adding oil production to the market and trade policies causing global demand to decline, the outlook for the oil industry is not as bright as oil prices near breakeven prices for producers.

EIA is forecasting global oil demand increasing by 400,000 barrels per day less than they expected in their last forecast, with growth at 900,000 barrels per day in 2025, and that WTI oil prices would average around $64 a barrel this year, dropping to $57 a barrel next year.

Because shale oil producers need around $61 to $62 per barrel to break even, those forecasted oil prices could result in idled rigs and economic hardship for small shale oil producers. This is nothing new in the energy business, and luckily, the United States is blessed with the most creative and dynamic oil explorers in the world.

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