Blog Post

3/5/15: Utah Oil Prices 101

By: Natalie Gochnour

Originally published in Utah Business

I live by a Costco store and watch in amazement as people line up in their cars to purchase fuel. Am I imagining it or have lines gotten longer since motor fuel prices have been sliced in half? The plummeting price of oil has caused a rippling effect through the global, national and Utah economies. It’s the biggest economic news since the Great Recession and something we all need to understand better. Here’s my attempt at describing Utah Oil Prices 101:

Lower oil prices benefit the Utah economy.

Lower prices mean more consumer spending, reduced transportation costs, lower input costs for manufacturing and enhanced consumer sentiment. These benefits lubricate the economy and more than make up for the negative impact on Utah’s oil and gas industry. It’s like a large tax cut that creates more disposable income for Utah families and increased profitability for Utah businesses.

Utah is an energy state that also has a well-diversified economy.

Utah has plentiful oil, gas, coal, geothermal, wind, solar and other energy assets. Anytime prices for any of these commodities rise or fall significantly it impacts the economy. But unlike many energy states, Utah’s economy is well diversified. In addition to energy, we have mining, tourism, defense, tech, life sciences and other growing industries. This economic diversity helps us withstand oil price shocks better than most energy states. The most oil and gas dependent states (measured as oil and gas employment as a percent of total) are North Dakota, Wyoming, Alaska, Oklahoma and New Mexico. These states will be hit hard if oil prices remain at or near current levels.

Portions of Utah are extremely dependent on oil and gas jobs.

Even though Utah’s economy is well diversified, areas of the state are not, particularly in rural Utah. Duchesne County is the ninth most energy dependent county in the country. One-third of the jobs in Duchesne County are directly related to oil and gas activity. Boom and bust are part of Duchesne County’s history as the most economically specialized (and dependent) county in the state.

Utah oil producers operate at a competitive cost disadvantage.

Oil producers in Utah take an $11-$17 per barrel discount on their product due to the wax in their product and the cost of accessing refining capacity. Utah’s oil economy depends on higher prices to stimulate activity. As a consequence, low oil prices impact Utah energy development more than many other low-cost oil extraction and production states.

Falling oil prices are both a supply and a demand phenomenon.

In late November the Organization of Oil Exporting Countries (OPEC), which controls approximately 40 percent of the world’s oil supply, failed to reach agreement on production controls. This sent the price of oil falling. Increased supply from OPEC countries and from technological advancements such as horizontal drilling and hydraulic fracturing are flooding the market with increased supply. Combine that with weak demand because of tepid global economic growth, increased fuel efficiency and a switch to many alternative fuels, and you get oil prices below $50/barrel.

Boom and bust are the norm in energy development.

The industry has lived though price shocks in the past and will live through them again. Consumers are accustomed to motor fuel prices that change on a dime. The prevailing wisdom right now is that low prices will be the norm in the near term, but higher prices will return again. Enjoy it while it lasts.

Next time you fill your tank, remember the importanc