Tuesday, October 21, 2014

Recent Decline in Gas Prices

     What caused the recent decline in gas prices and is that good or bad for the economy? A Reddit reader asked the question, "Why is the recent drop in gas prices a bad indicator for the overall economy?" The top answer chosen stated,
     "It's because oil prices are a fairly good indicator for how well people think the economy is doing. The central idea is that everyone, and every business uses some form oil to conduct operations. As such, higher oil prices tend to reflect an increase in business activity and lower prices reflect a slow down. Now the tricky part is that the oil price you see on TV is actually the price a few months down the road. The oil price displayed on the news is what's know as an oil future, basically someone is buying a contract to receive oil a few months from now at whatever the price is expected/predicted to be. Overall gas prices themselves don't necessarily have a large impact on the economy, but the economy has a large impact on gas prices, that's why so many people look to it in order to gauge economic performance."
In reply to that,
     "There is no "speculation" on why the prices are going down. We know why they are falling. Saudi Arabia increased production to drive down the price to stave off viability Oil Shale. They are protecting their place in the market. Oil Shale cost more to use so the higher the price the more viable it is. If the prices are to low then it is not worth mining. My speculation is that this will have a positive effect on the US economy. People will have more to spend at X-Mas and travel more."
In reply to that,
"A couple of problems with this:
1) You mean shale oil, not oil shale. Unfortunately they are very different things. Oil shale is a rock that contains organic matter but hasn't turned to oil yet, and nobody has figured out how to make oil out of it cheaply. Shale oil, or more generally tight oil, is oil that is hard to get flowing to the well but is otherwise fine. The recent boom in the US is all about tight oil.
2) Saudi Arabian production is the proximate cause of falling oil prices, but as for the Saudi motivation, it's not so clear. For example, it's quite possible that the US asked Saudi Arabia to produce more in order to hurt the Russians, who rely on oil exports. Putting some tight oil producers out of business could just be a bonus.
I agree with you on the economic impact. Energy prices have been central to the economic story of the past decade, and this is the best news in a while."
In reply to that,
"Saudi Arabia did not increase production - a false assertion made throughout this thread. They're simply not paring back production as they normally would because no matter how much they pare it back, the price will not be propped. Normally this isn't a problem, but many oil (opec) nations build the price of oil into their budgets and so falling oil prices means they need to pump MORE oil - not less- to balance the budget. This increases supply, and harms cooperation in the cartel."
And finally,
"In the last few weeks, the US overtook Saudi Arabia in oil production."
     The fracking boom, shale oil, cheap coal, cheap natural gas and Canadian Tar Sands are all factors in the price of gas at the pump and are also related to Fairhope and its community.