The availability of a reliable energy source is central to any growing economy in the 21st century, and the United States is certainly no exception to this requirement. Some of the energy milestones achieved over the years in the U.S. include the significant improvements in machine production efficiency. Of course, a great deal of the energy milestones are due to large growth in energy independence facilitated by . Now let’s take a look at the dynamics affecting the period of low gas prices we saw ushered in late 2014 and continuing today.
As the national average of gas prices hover around $2.10 in early February 2015, fill up days are certainly like Christmas mornings when considering the average of around $3.25 just a year ago.2 This is also in the face of California and New York’s grossly overpriced fuel pulling up that average, since an individual in Idaho could fill up at a rate of $1.90. But before you start purchasing your Chevy Suburbans, Cadillac Escalades, or even Hummers, which seem to get even bigger and more expensive by the year, our heydays of low gasoline prices are still thwarted by Venezuela’s unbelievable six cents per gallon.3 How does such disparity exist, and what exactly is behind the seemingly random determination of gasoline prices?
What Determines Gasoline Price?
The dynamics of gasoline prices is best understood simply in terms of the demand and supply of its starting material, crude oil. On the international market, crude oil is the substance that is traded. Gasoline is then produced at local refineries instead of being transported across the globe. Like any type of commodities market in the world, oil is also subject to the powerful forces of supply and demand in the market. In the case of Venezuela, a country with a large natural supply of oil, there is a low overall consumption of oil. As a result, the government can afford to bear a low set point for gasoline prices since most of Venezuela’s oil is sold on the international market. If we consider the demand for gasoline, the U.S. has one of the highest rates of vehicles per capita at a whopping 786 vehicles per 1000 people.4 This is on top of the U.S. having a substantial industrial demand for energy. As a result, there is a significant demand for gasoline in the U.S. which may drive up prices due to limited supply.
In regards to demand supply economics, one of the most apt examples of drastic gas price fluctuation can be recounted with the 1973 oil embargo 5 enforced by OPEC (Organization of Petroleum Exporting Countries). OPEC is a collective of the largest oil producing countries in the world and has also been creatively dubbed the “oil cartel,” given its unprecedented influence on oil prices based on its own free will. The setting of the oil embargo was amidst escalating Arab-Israeli tensions, resulting in the ban of oil exports by Arab members of OPEC to countries such as the United States. Such an extreme loss in supply was reflected on the subsequent price increase and artificial reduction in demand by an imposed curfew on motorists in the U.S. In synopsis, a large demand for gasoline coupled with a limited supply is a driver for higher prices, while low demand and abundant supply would decrease gasoline prices.
In addition to demand supply dynamics, the commodities market itself has a major influence on the price of gasoline. As a futures market, speculation on the price of gasoline can drive gas prices dramatically up by large investment groups placing hedge bets on increases or decreases in oil prices.6 At times, such an artificial hike on price may follow from a global event that truly affects the supply of available oil to the U.S. such as an active conflict near the Strait of Hormuz, which is a junction through which 20% of oil exports pass.7 Many times, however, speculation on completely inconsequential events can also artificially drive up oil prices.
Gas Prices Today
A discussion of the dynamics of gasoline prices brings us back to our original question, why have gas prices suddenly fallen? The answer is enrooted in many of the factors discussed so far. First, there has been a substantial increase in homegrown supply from the rise of shale oil in Canada and also North Dakota, Texas, and several other States.8 In fact, the shale oil boom has allowed for a 65% increase in oil production from 2009 through 2014.9 Additionally, there has been a rise in available natural gas from shale reserves thanks to technological development in drilling.10 As a result, ventures to extract shale oil have a co-benefit of producing substantial output as well.
While supply has increased domestically, the demand for oil and gasoline has declined significantly in the U.S. as a result of fuel efficient technologies, especially in the transport sector. Nowadays, it is fairly common to use natural gas powered buses, . From 2012 to 2013 alone, electric vehicle sales increased by a whopping 228 percent!11
Economic growth, or rather a pull-back in growth internationally, is another reason for decreasing oil prices. China’s massive growth and accompanying competition for energy had helped drive up oil prices for the last several years. However, the more recent slowing of growth in Asia has helped facilitate the stabilization of demand for oil that has played its part in lowering the market price.12
Furthermore, OPEC has also played its role in driving down oil prices by refusing to curb supply. Typically in events of falling demand, OPEC has traditionally resorted to lowering supply to help offset the price drop in the market. Intriguingly, OPEC has not taken action to change supply so far, and some speculate that this may be linked to an effort to undermine the markets of newly emerging shale oil.
Effects on the Environment of Falling Gas Prices
The dramatic increase in oil prices over the years have prompted many of us to purchase fuel efficient vehicles, thereby dumping our large block engines for 3 cylinder eco boxes. But would low prices once again prompt us to go back to our gas guzzling 100 L engines? The effects of cheap gas reach far and beyond in our daily lives.13 Cheaper gas has a large impact on our general driving behaviors, and indeed one can witness far more driving when gasoline prices are cheaper, leading to greater over the time period. Americans saved $13 million on gasoline during the months of November and December 2014, but it is estimated that $ 5 million of that was then spent on more gasoline!!! Statistically, since more vehicles are on the road, there has also been an increased incidence of accidents. One estimate has attributed a $2 reduction of gasoline price to 9000 road fatalities annually.14
More troubling, however, is the effect on investments in clean energy. An ironic circularity in cheap gas prices is that while clean energy ventures have acted to reduce fuel costs over the years, they may also be influential in diminishing clean energy ventures. Without the market pressures in favor of higher efficiency and green technologies, we may continue to forward an unsustainable path of oil consumption that is harmful for both our environment and economy. While the widespread allure of cheap gas is tempting, it is our role as responsible consumers to support a culture of environmental awareness that promotes conservation and that support our environment as well as our long term finances.
