It’s been three-and-a-half years since the retail price of a gallon of gasoline topped $5 and the price of a 42-gallon barrel of U.S. crude oil peaked at just below $139.
This week, the national average price of gasoline dropped below $3 a gallon for the first time since 2021. And there was much rejoicing.
Some discount gasoline stations in Texas were advertising that their prices were below $2. A few counties in California saw average prices falling nearly to $4, according to AAA. California’s statewide average, as of Sunday, was $4.47, highest in the United States.
The celebration included a number of analyses that crude oil prices will continue to fall over the next year. Winners, according to Bloomberg News, include oil importers (think China), refiners, oil traders, the U.S. Petroleum Reserve and maybe President Trump.
The losers will include oil-and-gas drillers, oil-rig construction companies, offshore boat companies that ferry supplies and people to offshore rigs, petrostates like Russia and the members of the Organization of Petroleum Exporting Countries that count on high oil prices to finance government activities.
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But it is not clear how long this oil glut will last. It may prove to be short-lived.
Oil (and natural gas) are extracted via wells from beneath the earth’s surface, and, like any well, an oil well (or oil-and-gas well) will go dry. Most oil wells drilled in Pennsylvania in the 19th century played out long ago.
So, if you’re an oil company, selling oil (whether to a refiner or as gasoline to a station on an Interstate) is only part of a company’s value. The reserves the company has and its ability to find more oil and bring it to the surface are the most important determinants of the company’s value.
Just as a retailer must invest in inventory to have products that customers want, expect and will buy.
Exxon Mobil’s reserves total nearly 20 billion barrels of oil and oil equivalent. Chevron’s reserves were about 9.8 billion barrels at the end of 2024. Saudi Aramco reports reserves of 250 billion barrels, according to Statista.
How long prices will continue to fall is open to question. Crude oil is among the world’s most political commodities (along with sugar). But there are some realities that limit how long the current price environment will last. Chief among these:
- Geopolitics. One of the factors that sent global oil prices soaring in 2022 was Russia’s invasion of Ukraine.
- Extraneous factors such as rapid and intense recovery from the worst of the Covid-19 Pandemic.
- Prices themselves. Soaring oil prices begets expansion and investment. But when supplies exceed demand, prices fall. And all that spending ends in a nanosecond. In the 1980s, prices dropped sharply as fuel consumption fell. States like Texas, Louisiana and Oklahoma suffered major recessions.
That’s the basic reality now with crude oil at $60.14, down 16% in 2025 with less than four weeks left.
Energy stocks struggle this year
The energy sector of the Standard & Poor’s 500 Index represents less than 3% of the total market capitalization of the index and sees more busts than wild rallies. (The technology sector of the index represented 34.6% of its market cap at the end of November. )
In the 1970s, in the midst of two Arab oil embargoes, the sector market cap topped the index. It was 16% of the index in 2008 when crude oil rose above $140 a barrel.
Energy bulls believe their day is coming again. The reason: Production coming out of the giant Permian Basin region of West Texas and southeastern New Mexico is starting to see production fall, according to Goehring & Rozencwajg, a New York investment firm that concentrates on natural resources.
The production from the Permian Basin is, by far, the biggest of any producing region in the United States. So, if production is falling, supplies should fall, too, and that will boost oil prices and oil company stocks.
The basin was seeing production grow as much as 400,000 barrels of oil a day in 2023, according to the U.S. Energy Information Agency.
Oil from the Permian has been the single biggest source of new oil coming into global oil markets since the 1990s. In other words, the Permian made the United States a global oil power.
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How the basin emerged as a giant
It required brains to penetrate the basin’s complex geology.
A critical pioneer in developing the field was the late George Mitchell. His Mitchell Energy & Development (now part of Devon Energy) learned to unlock reservoirs or oil and gas with hydraulic fracking techniques: pumping water and chemicals deep underground to break up the rock structures and free the oil and gas to rise to the surface. (And the success for many companies has depended on how well their computer systems analyzed the geological data.)
The Permian’s subfields are showing enough declines that, when coupled with falling output in other oil-and-gas fields around the world, it may not take more than a few years before crude oil prices rise to $80-to-$100 per barrel, suggested analyst Peter Boockvar during a recent CNBC appearance. Boockvar is chief investment officer at One Point BFG Wealth Partners, a Parsippany, N.J., money management firm.
In their November report, Goehring & Rozencwajg note that the International Energy Agency sees global oil demand rising quite steadily from now through 2035 to 82 million barrels per day, but global production will be coming up 17 million barrels a day short of demand.
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Reasons for the shortfall:
- Exploration won’t be able to find and develop enough new reservoirs of oil and gas. (It takes up to 20 years from finding a good prospect to actually pumping the oil.)
- The depletion issue for wells, like those in West Texas, are being depleted at ever faster rates.
The analysts’ gloomy conclusion: OPEC will be the dominant player in the energy industry again.
Challenges to fix problem
Is there any way around the problem? It’s complicated. Many people who study global oil markets were expecting the arrival of electric vehicles to help. But the EV manufacturers , including Tesla, Rivian, Ford and General Motors, are struggling to develop products that can appeal to all buyers from all income levels.
Many automakers are abandoning some new EV projects because the costs are so high that only the rich can afford them.
The Goehring & Rozencwajg analysis suggest rehabilitating wells can boost production but only for the short periods. New reserves, preferably really large, need to be discovered.
The question then really needs the attention of all of us.
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