Future Fuel prices

Like millions of Americans, Sam Irvani assumed higher gas prices were inevitable. "I got the Volt in May and I think I've gotten gas only one time since then, " explains Irvani about his new Chevy plug-in hybrid. "My commute is about five miles either way. I had been driving a BMW 550i, but it made sense to drive something less expensive."

Conventional wisdom has fueled millions of similar car-buying decisions. By now gas was supposed to be $10 a gallon and we would all have to trade in our pickups and big powerful cars for hybrids and teeny-tiny hatchbacks.

Well, conventional wisdom was dead wrong. Gas is cheap. It's likely to get cheaper. And it's going to stay that way.

The Defeat of Pessimism
Peak oil theorists, environmentalists, Malthusian malcontents, pessimistic economists, moms, dads and virtually everyone else have long been convinced that petroleum prices were headed higher and only higher. Oil was running out, scarcity was coming and the battle for world resources would be vicious and expensive. No one was predicting this: gas prices that, controlled for inflation, are nearing historic lows.

Back in May 2014, when Irvani leased his Volt, according to the U.S. Energy Information Agency, gas was selling for a nationwide average of $3.68 per gallon — and well over $4 a gallon in Southern California where Irvani lives. By December that average price had dropped to $2.57, with California prices edging under $3 and prices in places like Texas diving down well below $2.

Here's why. Supplies are up and demand is nearly flat.

Lots of Supply
Back in 1956, while working at Shell Oil's research lab in Houston, M. King Hubbert predicted that oil production in the United States would peak between 1965 and 1971, and then enter into inevitable decline. When that peak was reached in 1970, his theory was extrapolated out to production across the globe. The end was nigh.

But the development of advanced hydraulic fracturing techniques (fracking) and other unconventional technologies has recently resulted in a radical increase in American oil production. From a low of 5 million barrels a day in 2008, production has steadily increased until this past October. America produced more than 9 million barrels a day of oil, not far from the 9.6 million barrels a day peak in 1970.

Oil is a fungible commodity. So the more oil the United States makes for itself, the more supply there is for every other country to use. In 2012 for instance, the U.S. pumped 38.8 percent of what it used domestically, and imported another 15.1 percent from our friendly neighbor to the north, Canada. By October 2013, U.S. domestic oil production was greater than oil imports for the first time since 1995.

The EIA expects U.S. oil production to run at about 9.3 million barrels a day during 2015. That's not enough to meet the country's consumption, but it is enough to knock back oil imports to their lowest level since November 1994. And that in turn has led to the U.S. trade deficit shrinking, in November, to its smallest level in 11 months.

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