the price of gas

January 23, 2016
Price of gas near Seaworld Orlando

Gas prices near Seaworld Orlando, January 2016

This is what I paid today when I filled up my wife’s Prius. It was just a block down from Seaworld Orlando. Total cost for a little over nine gallons was $16. My wife will then drive on that for about two weeks. Pretty cheap, right? I haven’t seen this low a price since the early 2000s, right before the first Charlie hit Florida in August 2004 and drove the price of gas to around $2.50/gallon. And that’s where it stayed, climbing ever higher until I paid $4.14 in August of 2008. Even after that, it hovered around $4/gallon for the next four years, as you can see below at a local Hess station near Universal Studios Orlando in April 2012 (prices of gasoline and oil in 2012).

Orlando Gas Prices 7 April 2012

Gas prices near Universal Studios Orlando, April 2012

Now I’ve watched the price collapse to levels not seen for over a decade. As of Friday a barrel of oil is sitting around $32/barrel. This is down from the hundred and change for a barrel of oil from a year ago. Why? Why did the price of oil climb so high to cause so much damage to us economically? And why is it collapsing so far, and so fast right now? I haven’t any real facts, but I do have my share of conspiracy theories.

The story everyone wants to trot out is that demand for crude has dropped while supply keeps ramping up. There’s a huge oversupply right now, and it appears that nobody is willing to cut back. Which leads me to my conspiracy theory.

We’ve been living with the peak oil threat since 2000, when it started to crop up in various economic magazines. We were supposedly running out of raw petroleum stocks, and the existing oil fields were heading for exhaustion. US oil fields, especially in Texas, which is the fact everyone was waving around in this argument. And so it appeared in hindsight that the markets began to factor in this peak oil theory into pricing; the more we used, the less was left, and that made what was left in the ground ever more valuable. And so the raw price of crude began to rise, and with it, the price of refined gasoline. Yes, I know this is simplistic, but the basic rule of economics is that if the cost of your raw materials rise, then so do your finished products, for whatever the reasons.

But this last six months have blown a big fat hole in that theorem. First, the cost of petroleum over the last fifteen or so years have driven folks to look for cheaper alternatives, both in alternate energy sources (solar and wind) as well as alternative sources of fossil fuels (fracking for natural gas, shale oils). Those two combined to drive down the consumption of oil in many markets. And let’s not leave out the increasing efficiency of all our machines, and the brute fact that the high cost of oil has hurt us economically, killing businesses and putting a lot of folks permanently out of a job. All these have combined to drive down consumption. As consumption went down, production stayed steady, and raw stocks increased. And the price of crude dropped, especially when everyone who played in the oil commodities market realized just how much an “overhang” existed.

That overhang is being driven by deliberate overproduction by all the OPEC members, especially Saudi Arabia. Add to the fact that Iran is now exporting again, and there’s no other place for this to go except into storage, increasing the overhang. Even the short spike on Friday, driven by #blizzard2016, won’t even come close to soaking up the oversupply.

So the question is, was this a deliberate conspiracy by OPEC and friends to kill us economically? Or was it just plain old greed by the producers and the commodities players? After all, there’s the old saying that you should charge what the market will bear, and there’s been plenty of that for a good decade. My money is on greed. Paraphrasing Hanlon’s razor, never attribute to malice that which is adequately explained by greed.

My concern now is that people are lazy. Will the prices drive all the alternate sources of energy out of business as well as kill all attempts at energy economy? We’ll just have to wait and see.