Comments on: Not that I'm complaining, but how did gas get so cheap?

Question: Not that I'm complaining, but how did gas get so cheap?

Faint of Butt — Tue, 25 Nov 2008 08:54:24 -0800

Not that I'm complaining, but why have gas prices dropped so dramatically in recent weeks? I understand how they rose so high-- chaos in the Middle East disrupted the oil supply and hurricanes destroyed some processing capability in the US-- but I'm seeing close to $1.80 a gallon now when I thought I'd never see under $3 again. Forgive me for my ignorance, but I feel like I missed something.

By: Tomorrowful

Tomorrowful — Tue, 25 Nov 2008 08:57:26 -0800

Very simply, demand dropped like a freaking rock. The economy's in bad shape; people are shipping less Stuff, because nobody's buying Stuff. People are also driving less, due to cutting back, not working, etc, but the big factor is simply the faltering economy destroying demand.

By: scabrous

scabrous — Tue, 25 Nov 2008 09:14:52 -0800

Tomorrowful has it. To understand how it works in economic terms, here's a good summary on demand shifts and how they affect price.

By: GuyZero

GuyZero — Tue, 25 Nov 2008 09:18:19 -0800

It's a combination of production ramping up to exploit high prices and demand dropping to avoid high prices. $4 gas causes people to change their driving behaviour and it's a pretty great incentive for oil refiners to get more production capacity online. Unfortunately, by the time the changes are firmly in place... *poof* prices fall.

Also, prices have always swung seasonally, just not this much. But it's typical for November gas to be cheaper than August gas.

By: Class Goat

Class Goat — Tue, 25 Nov 2008 09:18:30 -0800

Hurricanes didn't destroy the Texas refineries, they just took them offline. They're back running again, so supply of gas is back up to normal.

By: stupidsexyFlanders

stupidsexyFlanders — Tue, 25 Nov 2008 09:21:48 -0800

Another factor is that at their peak, oil prices were in serious bubble territory, for reasons of speculation and geopolitical uncertainty, and what we're seeing now is the day-after crash. The implication is that the prices are as unreasonably low now, as they were unreasonably high earlier in the year.

By: racingjs

racingjs — Tue, 25 Nov 2008 09:24:28 -0800

Subtle difference, but I don't think demand has dropped yet. What makes gas cheap is that demand is expected to drop like a freaking rock. So, in one word, speculation.

By: zhivota

zhivota — Tue, 25 Nov 2008 09:36:32 -0800

Demand has in fact dropped, just check out the statistics on vehicle miles traveled:

Vehicle Miles Traveled

On a macro level, the demand is more aptly described as "staying the same," even though it has actually dropped minutely for some months.

By: frieze

frieze — Tue, 25 Nov 2008 09:36:33 -0800

Also it's worth noting that the weakness in other parts of the economy has made the dollar stronger.

By: LionIndex

LionIndex — Tue, 25 Nov 2008 09:38:25 -0800

Subtle difference, but I don't think demand has dropped yet.

No, there have been documented reductions in the amount of vehicle traffic. Less traffic is pretty much synonomous with less demand. In California, we've got over 8% unemployment, which is quite a bit fewer people driving to work, so that also reduces demand. I think you're right that there's an anticipation of less demand that factors in, but there's already been a drop.

By: cockeyed

cockeyed — Tue, 25 Nov 2008 09:48:35 -0800

To me this is as mind-blowing as having Arnold Schwarchenegger as our governor.

I felt completely helpless (as most people) to do anything about gas prices. I must have been fantasizing that some one person or entity had control of the price, because I am shocked that this is "allowed" to happen. This drop has been incredibly sobering.. or maybe I should say intoxicating.

Previously, I felt as though demand for gasoline was pretty much guaranteed, that even the most aggressive conservation practices would be outdone by supposedly ever-expanding Indo-Chinese industry.

But now, I am realizing that SUPPLY of gasoline is also pretty much guaranteed. All of these companies have vast networks of pumping and refining machinery, which they would rather keep pumping along at full speed, selling gas and oil for whatever they can get.

By: TomMelee

TomMelee — Tue, 25 Nov 2008 10:01:12 -0800

I heard a report that a big part of it is that China is seriously hurting right now. Apparently a big hefty chunk of their economic expansion was based entirely on US and European markets, heavy speculation, etc, and now they're in baaaaaaad shape. According to the report (which I want to say was on NPR), China's demand has cut waaaaaay because because their so-called economy is in the hole worse than ours, because of ours. Also, as the dollar deprecited, US exports increased because of the weak dollar to the stronger foreign money---which hurt them too.

We've got $1.66 down here.

By: Ironmouth

Ironmouth — Tue, 25 Nov 2008 10:36:02 -0800

Remember that prices incorporate what people believe will be the future price of gas. Right now, market participants believe that demand for gas will be low for some time in the future.

By: Nahum Tate

Nahum Tate — Tue, 25 Nov 2008 10:58:20 -0800

Winter gas.

By: randomstriker

randomstriker — Tue, 25 Nov 2008 10:59:43 -0800

Agreed that demand has dropped, but the essential factor that no-one has mentioned is price inelasticity. i.e. how much does price affect demand?

Fuel consumption patterns change slowly -- you have to get a different car, find a different way to travel, find a different way to transport your goods, etc. Thus small, short-term changes in gas prices don't really affect demand.

In a shortage, it means suppliers can gouge consumers before demand drops. In a surplus, it means prices have to drop a lot before consumers come back. Hence the volatility that we've seen over the last year.

By: damn dirty ape

damn dirty ape — Tue, 25 Nov 2008 11:31:53 -0800

Gas usually goes down in the winter. On top of it there was a world-wide freakout when gas hit 4 dollars. Some people changed their gas usage and lots of oil companies were yelled at by powerful governments to raise production as much as possible as soon as possible. On top of that, the storms in the gulf are gone and those refineries are back online.

Due to the economic mess, a lot of people have canceled trips and other gas using activities. Airlines are buying less fuel.

Supposedly, one of the factors that led to 4 dollar gas was some over-the-top speculation on production. Now that production is at a higher level the bubble has fallen out.

Lots of articles about OPEC show that there's a lot of disagreement about cuts and when to perform a cut. My personal take is that the US, UK, China, etc reminded these oil producing nations what their giant militaries could do to their palaces if need be and showed them a photo of Saddam being hanged.

The only person serious about a cut right now is the Venezuelan president, who has nothing to gain with better ties to the west.

By: ikkyu2

ikkyu2 — Tue, 25 Nov 2008 11:57:09 -0800

One of the things that doesn't exist, by the way, is large scale gasoline storage. Gasoline is generally made at refineries and immediately shipped out directly to gas stations by way of trucks. There are no giant gasoline tanks that contain years' worth of gasoline consumption in between these two places. (One major reason for this is that gasoline storage is dangerous.)

If such giant tanks, gasoline-inventory tanks, existed, they would act to buffer price swings. When gas was expensive, they would get drained down to empty, retarding and slowing price rises. When gas was cheap, they would get filled back up again, retarding price falls. But there are no such tanks. So that doesn't happen.

There is pretty much one input to the gasoline manufacture process: crude oil. Crude oil plus a working refinery yields gasoline. Since the gasoline is all getting sold to retailers as it is made - there's none hanging around to influence the price - the price of crude pretty much determines the price of gasoline at the pump.

Aggregate demand for gas to fuel your car at these low prices hasn't dropped all that much- it's dropped a little - but aggregate demand for crude has. And there is the ongoing debate about whether speculators, options and oil futures artificially inflated the price in the first place - it probably did to some extent. Those price changes get passed along to gas consumers like whiplash because there is so little inventory kept in the delivery system.

By: Faint of Butt

Faint of Butt — Tue, 25 Nov 2008 13:20:33 -0800

One of the things that doesn't exist, by the way, is large scale gasoline storage.

Isn't that pretty much what the Strategic Petroleum Reserve is?

By: yath

yath — Tue, 25 Nov 2008 13:44:19 -0800

From your link:

The Strategic Petroleum Reserve (SPR) is an emergency fuel store of oil...

It contains petroleum, not gasoline. This is why the refineries are so important. Even with plenty of oil, there will be no gasoline without refineries.

By: GuyZero

GuyZero — Tue, 25 Nov 2008 15:09:25 -0800

If such giant tanks, gasoline-inventory tanks, existed, they would act to buffer price swings.

No they wouldn't. When you maintain an inventory pricing is set on the cost of replacing that item in inventory (assuming cost-plus pricing) rather than the cost of producing the item in the first place. At least according to "The Stragtegy and tactics of Pricing" by Nagle and Holden. So buffer size makes no difference in pricing.

By: Riverine

Riverine — Tue, 25 Nov 2008 15:48:01 -0800

Prices in Buffalo remain, on average, 30 cents more per gallon than anywhere else in the mainland U.S. Which is inexplicable and pissing me off.

It feels a lot like the false crisis PG&E created over electricity demand in 2000 or so.

By: Rash

Rash — Tue, 25 Nov 2008 16:07:22 -0800

But now, I am realizing that SUPPLY of gasoline is also pretty much guaranteed.

For now -- but you're aware of Peak Oil, right? This price drop is a Christmas present which will not last.

By: drezdn

drezdn — Tue, 25 Nov 2008 21:12:02 -0800

Is there any reason companies that will need gas/oil in the future aren't hoarding it right now to protect against future price increases? Or is the money just not available to do that?

By: damn dirty ape

damn dirty ape — Wed, 26 Nov 2008 06:44:46 -0800

Gas, especially ethonol based, has a shelf-life of about 90 days before it starts breaking down. Thats not much time to wait for the prices to change. The infrastructure to transport, store, and deploy this gas must be pretty expensive too.

By: Rash

Rash — Wed, 26 Nov 2008 14:57:42 -0800

However, they can lock in the price they'll pay for fuel in the near future, which is how Southwest Airlines kept their fares low last summer.