Seriously, I’ve got $2.38/gal gasoline in Cincinnati this morning. If the dollar is so weak and global oil markets are pegged against it, AND in light of the horrid state of economic affairs across the globe, why does gasoline continue it’s nosedive?
I have read that there is a fairly sharp decline in demand right now, but that couldn’t account for this continuous plunge, could it?
Anyone have any insight?
Not that I’m complaining!
You have it right there. It is Econ 101, first day, first ten minutes of class. Supply and demand. Low demand = low prices. There is a lot of gasoline produced and when demand drops there is an excess of gasoline. Producers need to unload it so they lower prices.
Remember trading on the markets is in Futures. They are looking towards the future price of gasoline and bet on whether demand will be going up or down. Right now the world is looking at an economic recession (or contraction if you prefer) and the markets are responding by betting demand will go down thus depressing prices.
In order to boost prices some like OPEC may try to restrict production but I doubt that would do a lot. They can only restrict production so far (their whole economies are based around it) and the economic downturn is bigger than what they can reasonably affect much.
Prices often drop in soft economic times. IIRC, the Depression was a time of deflation, as was Japan’s recent stagnant period.
There ar other factors coming together as well. To the extent that oil speculation was driven by cheap credit, that has dried up. Iran, Iraq, and Georgia (Caucasus) are relatively quiet now, lowering the risk premium on oil prices. And we’re heading into the winter, when gas prices historically tend to drop, because people don’t drive as much.
I agree with what you guys are saying, but oil was over $140/bbl what, a month and a half ago (with all the pundits inferring that it would stay up there for the foreseeable future) and now it’s under $70/bbl?
I suppose what I am asking is there any other forces at play that drove the price down so damn fast other than supply/demand? I don’t see Americans driving much less.
When you figure out what were the forces that drove it UP so fast in the first place, let us know, and then we’ll work on the downward side. 
The US dollar has gained about 20% in value in the last couple of months, so that’s also part of the story. Other commodities have been dropping too.
This is the part I have trouble with. If OPEC lowers production, it may raise the price per barrel, but there are fewer barrels to sell. Sounds like the two would offset each other and OPEC is no better off.
Again, remember those prices you are quoting are the Futures prices. People speculating on the future price of oil. While the economy still seemed healthy we had China and India making heretofore unseen demands on the world’s oil supply and looking to continue that way for a long time. So, high demand = high prices. That demand has tanked and the Future outlook sees no reversal anytime soon. So prices went down.
As to other factors I would say the tight credit crunch we are in. It is hard for people to get loans to buy a tanker of oil they will sell at some future date. So, they do not buy a tanker of oil but something less. This further squeezes demand.
Well, it could all just be supply and demand (it’s not a one for one ratio…i.e. as demand drops the price doesn’t drop an equal amount) coupled with a current calmer international environment and no production or distribution disasters atm…or it COULD just be a capitalist plot by the speculators to catch us all off our guard or for some other reason in a three step plan that ends with ‘Profit!’. Where is gonzomax when you need him???
-XT
Or, as my boss said, it is a ploy by Bush to help McCain win the election by having his big oil buddies lower the gas prices right before the election. He was unable to give me the details as to how that would work, but that just shows how secretive and tricky they are.
Silly you, misunderstanding the power structure of the Bush admin. It was Dick Cheney and Karl Rove strong-arming those evil-empire oil companies into a temporary price drop to effect a Republican President.
But crazily, this reporter just got it off the wire that Bush and McCain were last seen leaving a party on a beach in Spain in a two-seater fighter plane in an attempt to “score some Andalusian tail” and to “better observe the power grid”.
The people who had positions on oil at $140 dumped it fast when oil went down, which caused those with positions at $130 to dump theirs, etc. A guy on Marketplace predicted this perfectly six months ago or so.
The reduction in demand started this off, but the speculative market accelerated the fall.
Well, there’s also the slowdown in China to consider. China is in an energy-intensive phase of economic development, so perhaps a dollar decline in output translates into a proportionately higher drop in energy demand.
You ask an interesting question: in a couple of months we might have the data to answer it more definitively.
Didn’t Walmart just kill a million Chinese jobs?
Ah, but prices are dropping. We need to solve for “gonzomin.”
Additionally, as Themenin said, one of your premises is entirely wrong, there is no longer a weak dollar. It works something like this: when turmoil hits the markets and continues, people look for safe places to park their money. Lots of funds had money invested in Emerging Markets, including the BRIC (Brazil, Russia, India and China. Once the value starts being lost people start to ask for their money back, or funds have to liquidate assets to cover other losses, this causes money to leave these economies bringing down their capital for production. Where does all this money go? normally to the capital markets, but as these are in free fall to government debt. The US dollar being the base of the economic system is the natural safe have, so lots of people buy US T-Bills and Bonds, so (supply and demand) US dollar prices rise against other currencies. The Euro hit a low of 1.28 US dollar per Euro yesterday (down from its high of 1.60. Therefore there is a strenghthening US dollar a weak economy in every industrialized nation (maybe Japan is a little better, but Europe and the US are slowing rapidly) and therefore all the growth in China and India and Brazil that relied on exports to Europe and the US is slowed down, and in the case of Brazil and Russia Oil and other commodities are going down, making their economies weaker. Therefore no need for oil in the US (or not as much), Europe or the Emerging markets equals lower prices. OPEC has threatened to reduce production to increase price, but at the end of the day if they do that it may hit them hardest, as they are almost 100% oil dependent and if people do not need that much oil and their reserves are full, well they could not buy as much oil at the higher price and force prices down. That is what people are betting on on low priced futures contracts.
As with everything a harsh winter where lots of heating oil is needed, a big disruption in oil supply or another such factor could bring prices bak up, but for the near future the world economy is going to be at a standstill or into the red for a couple of years.
Yep. . . depression = deflation. . . which is terrible when you’re in an agrarian economy, like during the Great Depression. . . and your crops ain’t worth dirt.
But, now is a great time to buy a car, a home, gas and any number of other things, if you have a stable job, the cash and/or can get a loan. And if you have a stable job and cash, you can get a loan.
But the folks who research such stuff do -
http://www.greencarcongress.com/2008/05/us-vehicle-mile.html
Can’t find more up-to-date data right now. I’ve been waiting to fill up my tank while watching the price drop several cents/gallon per day. Filled up today (7.0 gallons at $2.77.9) after voting for Obama.
Maybe yes, maybe no. What if homes come down another 20%? Is now a great time to buy?