Saturday, November 22, 2008

Why is gas $ 1.93 a gallon?

That was the lowest price I saw this morning on my errands.

I'm not being a smartass. I truly want to know. Six months ago, gas was $4.00 a gallon and going up. Please explain to me what happened in the world to plummet the price of gas to under $2.00. China's still demanding oil at a record pace. So is India. There wasn't some explosion of openings of new refineries in the USA. So, explain to me what happened.

Thanks in advance for the explanation.


Brian said...

I always thought it was interesting how it began to fall precipitously right before the election...and has continued to fall since. But I didn't want to come off as a conspiracy theorist... lol. Your skepticism is warranted.

But the official, economic answer...

The Financial shock, which had been building for years... but seemed to hit hard in Sept. (when a lot of different problems converged), is what most economists are pointing to. The wider economic ripple effects are starting to be felt (although struggling folks like me have been in recession and crisis for years now). It's a combination of issues.

1. The American economy is slowing fast....even faster than the measurement instruments can calculate. That means there is less manufacturing, less transport of goods, fewer people flying, fewer gas powered machines running, fewer construction projects, a reduction in auto sales, fewer people doing leisure driving/vacations, fewer people shopping, etc. In other words, demand has dropped in the Worlds largest....and even second largest economies (Japan being the second largest...and they just entered a recession)...among other economies. The entire EU is struggling too.... these 4 (U.S., Japan, EU and China) are the Worlds economic engine...and all 4 are taking a hit at the moment.

2. We are dealing with a global financial problem. This means, several economies (including China's) are being hit at once. China's economy has slowed rapidly over the past 2 months or so. In past economic slowdowns... when one or two economies faltered... other parts of the World could pick up the slack. But in a global slowdown... there is no region to make up for the loss in demand... everyone is struggling. This creates a shock for the oil markets.

3. Commercial shipping (for Trade) has slowed to a crawl.

4. OPEC is too slow to adjust to the current economic situation.... In fact, OPEC has probably not dealt with these kinds of economic conditions before. Despite their reduction a few weeks ago in the number of barrels produced each day... the price is still dropping. Eventually OPEC will catch up... but the organization isn't designed to respond quickly to economic they will be slow to respond and adjust production.

5. Speculators (those who bet on oil prices...and bet on them being higher) are bailing out of the Oil Futures Market. Oil is dropping so fast, that they can't accurately bet on what the prices will be...AND they can't make any money on oil as a commodity investment.... because the price has fallen so low. ALSO...I believe the Feds have been snooping around to see what these speculators have been doing. There may have been people artificially jacking up make money. So that's another reason they are bailing... (they started getting out before the Financial crisis hit in late Sept. early Oct.).

6. These low prices are temporary... once OPEC catches up and when economies start to stabilize, once air travel picks up...oil will go back up. It won't be as high as it was before... but we will get to $2.50 a barrel or so.

7. India and China are facing slowdowns as well, as I mentioned. And even with huge growing economies... they are still emerging economies. There are not enough cars on the road in India and China to completely control oil markets just yet... but they are catching up. It may take another 10 years before they are able to pick up the slack of economic slowdowns in Europe and the U.S. But like I mentioned... this economic slowdown is global... so there really isn't anyone left to pick up the slack right now.

Annette said...

I am in MO, near KC and it is only 1.38 talk about a shock to the system. Like you just a few months ago it was $4.00 a gallon here too. The only explanation I have heard earlier when it started dropping was that the demand was down. Well, I could believe that when it was at the 4 bucks a pop. But why now? Or have people just gotten so used to not traveling so they aren't?? I don't know. I was wondering too.

Anonymous said...

*head fake*
it never should have risen from its previous low. clearly it was price gouging--the bush machine needs traveling cash.

Ricketson said...

To add to what AI said...

The price of a barrel has dropped precipitously. It's down to $55 or so, from a high of $145. I think most of the change in gasoline prices is due to this drop in oil prices, though I think gasoline traditionally peaks in the summer due to limits on domestic refining capacity.

As for speculators, they can speculate that prices will rise or fall, so their activities don't necessarily push prices up.

Annette asks why demand hasn't surged as prices fall (i.e. why we haven't reached some sort of equilibrium).
I can think of two reasons:
1)people expect prices to surge again in the future, so they are making long term changes to their lifestyles and business models to reduce consumption.
2)the price drop has occurred simultaneously with financial panic, so everyone is trying to save money right now.

I don't think we need to appeal to any conspiracy to explain the price fluctuations. My explanation: the market is broken (and has been for a couple of years, actually) and is incapable of assigning meaningful prices to goods.