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Why’s gas so cheap? Or is it?

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Thu, Nov 20, 2008 at 12:33 pm

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Why’s gas so cheap? Or is it?

11-20-08 by dugan

 

I’ve been asked a lot lately about why "gasoline is so cheap." Yet
the question itself is a result of short memories. Gasoline is
certainly a ton cheaper than in July, when crude oil cost $147 per
42-gallon barrel, and gasoline at the pump topped $4.50 a gallon in
California, $4.11 nationally. Yet it was only three years ago that
crude oil shot above $50 a barrel, with gasoline just above $2.00 (as it is today).

This year’s battering of consumers and the economy by oil prices was so
ferocious that it made drivers forget how expensive $2.00-plus gasoline
looked in 2005.
The cartoon below captures what consumers worldwide thought about it.

oilpricecartoon.pngWhat made prices fall so fast this year was the
insanity of the peak prices in July. The peak had mostly to do with
speculative trading and almost nothing to do with actual supply (which
was ample) or demand (which was already dropping), even though hedge
fund managers and the Bush administration kept declaring otherwise. The bubble siimply burst after energy prices did a lot to damage a weak economy.

The
questions now are (a) how low will oil and gasoline prices stay? (b)
will oil companies and refiners cut back production fast enough to
raise prices and reap new profits? and (c) what do lower prices mean to
our energy future?

I still haven’t gotten my mail-order crystal
ball and can’t answer (a). As for (b), oil refiners are running at a
level near historic lows, using only 85% of
their operable production capacity. They’re cutting back especially
hard on gasoline, because they can get higher prices for diesel fuel.
The anecdotal evidence is that drivers are getting back on the road more,
so if refiners keep restricting production, even with oil so much
cheaper, the price will rise–along with oil company refining profits.

(C)
is a tough one. Biofuel companies are struggling, as are some wind and
solar power producers. If oil, natural gas and fuel prices keep
dropping, many will likely go out of business.  Consumer interest in hybrid cars has
fallen off a cliff, according to auto industry website Edmunds.com. For
consumers in the aggregate, going green is always in part a financial
decision.

It is absolutely in the oil companies’ interest to
have a period of comparatively low fuel prices to put the brakes on
renewables again. (That’s what happened to President Carter’s green
energy initiatives after President Reagan deregulated and de-taxed the
oil business.). Then, when prices inevitably rocket upward again, we’ll
all have fewer alternatives to cushion the blow.

Unless, that is, the new president and a cooperative Congress spend stimulus money on green infrastructure,
looking beyond the current recession-driven drop in petroleum. If
there’s any justice, they’ll help fund the projects by recouping the
unnecessary and unjustified tax breaks and loopholes that drove oil
profits to even more stratospheric heights in the last few years.

So
if you think gasoline is really cheap now, stretch your memory. And if
you think the oil companies have your best interests in mind, much less
the planet’s, think back a little further to the previous collapses of
wind, solar and electric cars.

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This post was written by:

Judy Dugan

- who has written 655 posts on Oil Watchdog.

Judy Dugan concentrates as an advocate on health care reforms, oil industry issues and telecommunications. She also writes and edits foundation publications and conducts media outreach.

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