It is not just surplus oil driving prices down

As many know, the price of gas continues to fall. Drivers have been smiling at the gas pump paying US$25 rather than US$50 each fill-up. It is obviously related to the price of a barrel of oil which is beneath US$30.

A key cause for the falling price per barrel is the glut or surplus supply in the market. It was already high, but Saudi Arabia decided to keep producing. Now, we are about to see Iran release more oil when the sanctions are lifted. This may drive the price down even further.

But, is it only related to the glut? There have been three trends that have and will continue to impact the demand side. First, as started by President George W. Bush and ratcheted up by President Obama, new cars must have increasingly higher miles per gallon (mpg) requirements. In 2015, there were more cars sold in America than ever before, which means buyers’ replacement vehicles will likely have better mileage. Even a new truck will have better mpg than the one it replaces.

Second, an increasing number of hybrid cars are being sold. It is no longer rare to see hybrids on the road. And, electric cars are starting to sell, but the pace is where hybrids were a few years back. It should be noted one of the new Teslas is the highest rated car ever. Once battery storage permits longer usage than today, the electric cars may take off.

Third, there has been a noticeable trend toward fewer licensed drivers, with younger people foregoing the license.  People are choosing to live in urban areas where a car is not needed. Plus, with more transactions online, they can reduce the number of trips to the store or for entertainment. Car sharing, ride sharing, mass transit, and cheaper taxi services are creating downward pressure on demand for gas and, as a result, oil.

So, we are embarking down a path of a new normal. The counterbalance is the growing number of drivers in emerging markets, but even that growth may pull back some with obvious congestion and air pollution. Plus, lower gas prices means more car travel.

The times are indeed a changing. And, our fossil fuel industries may need to accelerate their thinking in renewable energy sources for future revenue. The new normal may cause the recovered price of oil to fall short of the old price level, once the glut is used up.

19 thoughts on “It is not just surplus oil driving prices down

    • Agreed. When the two are matched together, it accelerates the movement toward renewables. Plus, cities are building with better access to mass transit, bike paths and walking trails through planned centers. Thanks for commenting, Keith

  1. I don’t understand finances much. But I do know gas prices lowering is a good thing. But how is it affecting the Dow Jones dropping? When I listen to the news they make that sound like they are related.

    • Kim, they are related. Energy company stocks make up an important sector of the stock market, so Exxon-Mobil, BP, etc. take a hit. On the positive side, we consumers and companies who have transportation and distribution costs, are seeing lower prices and reaping the savings. On the whole, it is a good thing when fossil-fuel energy prices fall, except for those who invest and work in energy. I wrote this as I believe certain industries like coal should look to alternatives. Typically, where coal is dug, the wind blows and sun shines, so those companies might want to put up some wind mills and solar panels.

  2. I would love to see the fossil fuel industry “accelerate their thinking”….or just start thinking at all! If they had any sense at all they would climb aboard the renewable energy bandwagon. It’s taking off! I read the other day that solar now employs more people than the oil industry!! So much for the old argument EITHER jobs OR the environment!

    • Hugh, if they want to be an energy company long term, they need to further diversify their portfolio. By the way, you might appreciate the record that the US car sales broke was fifteen years ago, when Bill Clinton was President. This goes hand in hand with significant job growth on his watch. Keith

  3. On the west coast we are also experiencing lower gas prices but, especially here in San Diego, they are nowhere near as low as elsewhere. I will be interested to see how this all plays out going forward. I’m not sure we can assume that oil prices will continue to be low (they have been up and down before), so I find it a bit disheartening when I hear that people are buying gas guzzlers again. Such short-sightedness. I loved my electric car (before someone ran a red light and smashed into me) and will probably get one again. The 80-mile range didn’t bother me since I hardly ever drove more than 10-20 miles a day. Tesla and other visionary companies continue to innovate so I imagine we’ll have better batteries soon. Btw, I think Tesla’s perfect score was downgraded by Consumer Reports recently because of repair issues. I keep hearing that this new generation is different in their transportation needs and desires and that might be true. Certainly social media is bringing on a sea-change that affects the way our society functions but I wonder if things will change as they get married and have babies and, maybe, move to the burbs. One thing for sure, it will be interesting!

    • Janis, the price oil will come back, but not for awhile and probably not like it was. I agree with you on people being shortsighted, but with that said, the bigger car purchase may get as good gas mileage as the smaller car it replaced. I have never been to San Diego, but many of my friends say it is a favorite destination. Thanks, Keith

      • San Diego is lovely but we often pay what is known as a “sunshine” tax. Some things are just more expensive here. Fortunately a lot of the up charge comes from regulations put in place to protect our environment. I’m ok with those!

      • Thanks for the heads-up, but helping the environment is a worthy cause. The folks upstate are not to found of methane gas right now.

  4. I’ve read that the falling price of crude is also politically motivated. ISIL sells crude at deeply discounted prices to fund their operations. Interestingly, the smile at the gas pump will turn to a frown when people realize that their stock prices have also dropped dramatically.

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