Yesterday, near Terrell, TX, I filled my car’s gas tank for
ONLY $1.99 a gallon. That sounds cheap doesn’t it? I suppose it does to those
of you a little younger than I. The problem is, I can still remember paying less
than 25 cents a gallon for gasoline. I am not an economist and will not or
cannot presume to make any economic predictions. But I did take Econ 101 in
college and can make a few comments on what happened.
We know that the price of oil has dropped tremendously. Here
are a few facts. Yesterday, December 18, the median price was right at $57 per
barrel. Back in June the price of oil was around $115 per barrel and most of
this decade has seen oil prices hovering around $100 per barrel. In 2008, the
U.S. oil production was 5 million barrels a day. By November of this year
production was 9 million barrels per day, almost double that of 2008. The price
of oil in 1998 was only $17 per barrel.
So, why has the price of oil crashed? All you really need to
know comes from Econ 101 and is known as the Law of Supply and Demand, which I do not believe has been rescinded.
There are four parts to this Law:
1.
If demand increases and supply remains
unchanged, a shortage occurs, leading to higher prices.
2.
If demand decreases and supply remains
unchanged, a surplus occurs, leading to lower prices.
3.
If demand remains unchanged and supply
increases, a surplus occurs, leading to lower prices.
4.
If demand remains unchanged and supply
decreases, a shortage occurs, leading to a higher price.
So, for the answer to what happened all one needs to do is
to look at the four parts of the Law.
Specifically, read part 4. Supply outstripped demand, leading to lower prices That’s
right, high oil prices had the oil and gas companies pumping and hydraulic
fracturing, or fracking, as hard as they could. They were making a killing at
those prices (just check their stock prices). Unfortunately for them, this
created the oil glut in which they currently find themselves. They simply produced
more oil than we were using or were willing to purchase.
Is this good or bad? That depends on who you are. Obviously,
if you are dependent upon the profits of the oil and gas industry, it is not so
good. On the other hand, if you are a farmer, trucking company, airline,
railroad, or customer of any of these businesses, then the crash in the price
of oil is a good thing. A drop in manufacturing and transportation costs could lead
to a drop in retail prices, which would benefit all consumers.
From a strictly personal point of view, one of the best
things that could result from these lower oil prices would be the death of
fracking. Fracking is a severe threat to the ecology of the earth. It pollutes
the air, soil, and water. It also requires millions of gallons of fresh water
per well and that water is lost forever. Fracking renders the water too toxic
to be recycled for reuse. Large portion of the U.S. oil producing areas are currently in the third or fourth year of
one of the most severe droughts on record. We should not be destroying this
precious, life-sustaining, and irreplaceable resource.
The cost to pump oil from a fracked well in the U.S. today
is about $65 per barrel. The industry can’t continue to pump oil at a cost of $65
per barrel and sell it for $57 per barrel and stay in business (I learned that
in Econ 101 also). However, fracking will continue as long as the price of oil is
high enough to cover the variable costs of pumping from wells already drilled,
but once they have sucked the existing wells dry I do not imagine there will be
many, if any, new wells fracked.
No one knows how long oil prices will remain low. But from
your Econ 101 lesson you can guess what will, in all probability, occur
eventually. If you aren’t sure, just check out part 4 of the Law of Supply and
Demand.
2 comments :
No doubt #4 will come to pass.
Ah, the days of 25¢/gal. gas. $2.00 went a long way back then. I remember filling up the Beetle and saving back 50¢ for two quarts of beer.
Youth is wasted on the young.
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