Daniel Yergin: Oil Prices Have Been Falling But Fracking Will Limit the Decline

When Americans take to the road this Thanksgiving holiday they will be paying about 6% less for gasoline than they paid a year ago. That’s because the price of crude oil has fallen.

Increased oil production due to fracking–the technology that breaks up shale rock buried deep inside the earth to release oil and natural gas reserves–has boosted U.S. oil output, and, in turn, reduced prices. Crude oil is trading near $93 a barrel, a five-month low, and gasoline prices are averaging $3.21 a gallon for regular unleaded, according to AAA. Natural gas is trading at $3.55 per million BTU, a few cents below the year-ago price.

What happens next to oil prices will, as always, depend on supply and demand fundamentals…and politics.

For crude oil, “the floor is established by the costs of these unconventional resources…at $60 or $70″ a barrel,” says Daniel Yergin, pulitzer-prize winning author of The Prize: The Epic Quest for Oil, Money and Power and vice chairman of IHS.
(His latest book is The Quest: Energy, Security, and the Remaking of the Modern World, which focuses on renewable and nonrenewable sources of energy.)

Yergin tells The Daily Ticker that future oil prices will depend on:

• If and when the Fed reduces (“tapers”) its asset purchases. Fewer purchases–or less easing–could strengthen the dollar and therefore reduce the price of commodities (like oil) that is priced in dollars.
• Negotiations with Iran. The talks have the potential to end or relax an embargo that has reduced Iranian oil supplies by more than 1 million barrels a day, according to the Congressional Research Service. In addition, production from Iraq and Libya have also been cut because of war and social unrest, respectively. Representatives from the U.S, Russia, China, Britain, France–the five permanent members of the UN Security Council–plus Germany resume meetings with Iran in Geneva Wednesday to curb Iran’s nuclear activity.
• Pipeline infrastructure in the U.S. The lack of adequate pipelines has created a bottleneck of supplies here, creating a wide price gap between West Texas Intermediate, the U.S. benchmark, and Brent, the European Benchmark, of about $15 a barrel.

Approval of the Keystone Pipeline, which would transport synthetic crude oil from the oil sands of Alberta, Canada, and from the Northern U.S. to the Texas Gulf, would help unlock that bottleneck, says Yergin. But first President Obama has to lift his moratorium on the pipeline’s construction.

“Here in Washington this is a great guessing game,” says Yergin.

The State Department is expected to issue its recommendations on the pipeline in March.