The price of gasoline in St. Louis averaged $2.02 per gallon on Friday, a little more than half of its $3.98 high last July. This week a gallon of regular unleaded is going for less $2 at many stations for the first time since January 2007.
Time to unload that efficient Prius for a roomy Escalade? Probably not. The good news is that sooner or later, the current recession will end. When that happens, the price of gasoline will go up. How far up depends in part on how we act while prices are low.
The danger is that we’ll repeat the mistake of the 1980s, when falling oil prices led us to abandon conservation and the quest to develop alternative fuels. That mistake set us up for last summer’s squeeze.
Last summer’s spike in oil prices was a study in what happens when demand exceeds supply. “There was rising demand in a world oil market that simply could not drag out any more oil,” says Bill O’Grady, chief market strategist at Confluence Investment Management in Webster Groves.
When that happens, just a little extra demand can shoot prices through the roof. “It’s as if you had one barrel of oil and 10 buyers for it. If 10 more buyers show up, the price will go up,” Mr. O’Grady said.
With the Chinese economy growing at 10 percent a year and demand for oil continuing to grow at 1.5 percent to 2 percent a year in the United States, it looked as though prices would rise forever. Speculators jumped into the market to ride the oil price wave. They made the problem worse, although there’s disagreement about how much.
Then high prices did what high prices normally do: they reduced demand. Beginning last spring, Americans started driving less. For the first nine months of this year, American gasoline consumption is down 2.9 percent, and diesel is down 5.5 percent.
But then came September’s financial meltdown, bringing with it the prospect of a deep, worldwide recession. Unemployment in October jumped 0.4 percent to 6.5 percent while 240,000 jobs disappeared in America.
Today’s oil prices reflect not only oil demand today, but also traders’ guess at what demand will be in coming months. Their prediction: Demand is falling, and it is falling so much that not even OPEC can control prices by cutting supply.
There is more oil now sloshing around the markets than the world can use. The forces that drove prices up are in full reverse. The price of oil closed at $60 per barrel on Friday, down from July’s high of $147.
This couldn’t have come at a better moment. Lower gas prices work like a tax cut. They free up billions of dollars that Americans can spend on things other than gasoline, such as mortgage payments and Christmas presents. And some of the money saved will stay in America, rather than ending up in Canada, Mexico, Venezuela and Middle East oil states.
Low gas prices also mean that gas-guzzlers look affordable again, and that’s both good and bad. Ford Motor Co. is adding an extra shift at its F-150 plant near Detroit because truck buyers have jumped back into the market.
That may help the automakers avoid a trip to bankruptcy court — good news for hundreds of thousands of employees. But if the United States ever is going to break its shackles to the oil sheiks and African dictators, we should act as if oil was still at $147 a barrel.
That means government policies should be directed at the long term: commitment to conservation and alternative fuels and to building high-mileage and alternative-fuel cars and trucks. Oil companies must keep looking for oil, despite the price bust. Gather ye $2 gasoline while ye may. Just don’t get used to it.
Yappers! The price of gas has been under $2.00/gal. for months in SW Mo where Republicans live. Here, where “no one wants to live” the price just dropped under $2.00/gal. They’ll keep it at $2.00 until after the folks at Big Oil shove money into Georgia to beat Jim Martin, then prices will go down some more!
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The current decline from nearly $150 a barrel oil started the day George Bush revoked the executive barriers to drilling off-shore. Yes, I am saying that and I am saying it based on fact. Obviously, there are more factors involved, but check the charts and you will see I am right.
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JJK said:
“Obama is already threatening to reverse the executive order allowing off-shore drilling. The day he does that gas will increase fifty cents a gallon and his popularity will drop below fifty percent.”
- So you’re saying the relative cheapness of oil right now has anything to do with the potential future of offshore drilling?
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Here is the layman’s interpretation. The more things change, the more things stay the same. The US did not learn from Jimmy Carter and we never will. The environmentalists will pressure Obama to do everything in his executive power to thwart drilling and energy exploration and independence in the US. They think windfarm jobs are going to save the enonomy and make us energy independent. They will put pressure on Obama with low gas prices to put enormous taxes on gasoline which will tick off the poor and middle class.
Sarah Palin is the only one who would have been progressive on this issue.
This will be another freight train for the Democrats. Good luck!
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Hey BJS–
First, if you think the President of the United States opposing off-shore drilling won’t affect the global price for oil you are delusiona and lacking even the most rudimentary economic skillsl.
Secondly, your feeble attempts to introduce racism into legitimate criticism of a sitting president is outrageous, purposely divisive and offensive. Obama may have been successful in using racism to quell his rivals during the campaign, however, he will now discover it won’t work anymore, at least with me. You want to be President, you better get used to people criticizing you. Obama was elected “president” not King (as some of his staff obviously think). Being black buys him zero slack as far as I am concerned. He is driving the bus on which we are all riders. I will demand he keep his eyes on the road just like any other president. Take your racist tactics and stick them…off-shore.
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I agree this article is over simplifying things and leaving quite a bit of the backstory out. This discussion doesn’t happen responsibly without discussing Bush and Cheney’s role. It doesn’t happen without discussing the role that the Iraq war has played. We can’t discuss African dictators without discussing the American oil companies that provide them with private mercenaries, American guns and rivers of cash. In short America created this situation.
Obama’s decisions are offshore drilling won’t have anymore impact than Clinton’s stance on the issue. (Now the latent racism expressed by many of his detracters is bond to impact the economy and international relations as foreigners watch how white Americans treat their first Black president.) This is about corporate greed, war and the politicians that bet on how much money they could make from both.
Consumers do have an obligation to curtail their gas consumption, but in the age of Jerry Springer like instincts, we shouldn’t expect much from Americans. They simply don’t give a sh*t about anything expect themselves on any given day.
This freight train is destined to run until it hits something…and crashes beyond repair.
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With the “ME” or “look at me” mentality in this country there will always be idiots that buck the system or trend for their self indulgent ways. I already see more gas guzzlers on the road since gas dropped. Every day I see many single occupants in a giant gas guzzling SUV on the road. (mostly women) Some peoples egos will always spoil things for the more frugal.
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Obama is already threatening to reverse the executive order allowing off-shore drilling. The day he does that gas will increase fifty cents a gallon and his popularity will drop below fifty percent.
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Hmmm… no mention of Bush, Cheney, nor EVIL Big Oil ??
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