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Why Cheap Gas Won’t Last Forever

My wife’s family lives in Michigan, so most summers we spend a week in a quaint town right on Lake Michigan called Holland. It’s a 10- to 12-hour drive depending on how bad traffic gets through Ohio, so every summer I have a heightened sense of what gas will cost to make the trip. With gas around $2 a gallon, filling up the SUV is somewhat palatable. But in the summer of 2014, gas prices had climbed dramatically to nearly $4 a gallon, so we decided to pull the plug on driving north and flew Delta instead.

Only 18 short months later, gas prices are in a dramatically different place. Average gas prices in Atlanta are close to $1.80 and last week Costco was selling gas for $1.65. That’s a more than 50 percent drop in gas prices — a direct result of oil prices that have cratered from over $100 per barrel to $30 per barrel as of last week.

While the oil crash has thankfully cut prices at the pump by more than half, it has also cast a long shadow over the U.S. stock market and certain parts of the economy (more on this later). In fact, the first week of 2016 was the worst opening week for stocks in recorded history, down more than 6 percent.

Are Teslas just crushing demand for gas? Are we finally consuming less fossil fuel and driving demand for gas off a cliff? In a word: no. According to the International Energy Agency (IEA), growth in global oil demand hit a five-year high in 2015. We are actually driving even more because gas prices are so low, further pushing up demand. In just the first 10 months of 2015, Americans drove a record-high 2.6 billion miles.

So it’s not a demand issue … it’s actually a supply glut. According to a JP Morgan study, global oil consumption has increased 4.3 percent since 2013. But global supply has grown an outsized 5.4 percent during that same period of time. The U.S. fracking revolution has increased oil production here in the States by a whopping 19 percent, while OPEC continues to grow its production despite cratering oil prices. Russia, the Middle East, Brazil and most oil producers around the world are bleeding money. And numerous studies project that if oil stays this low for much longer, as much as 30 percent of U.S. energy exploration firms could be out of business by 2017.

How does this affect us?

If it were time for us to head to Michigan now, we’d be much more likely to load up our gas-guzzling SUV (and soon-to-be four children) to make the drive. You may do the same thing next time you’re on the fence between driving and flying. So imagine this, oil stays lower long enough to put a third or more of energy producers out of business. Supply drops, but we’re still consuming the same amount of gas as we’ve gotten even more accustomed to hitting the highway. This is when gas prices will level off and start to head higher once again.

So enjoy your now affordable road trips while you can. Because as an old oil adage goes, “the best cure for low oil prices is … low oil prices.”

Read the original AJC Article here.


 

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