On Falling Gas Prices

The holidays have come and gone and a new year is upon us.  Life is good, the future is bright, and a fresh semester is under way. As we enter into this new year though, I find myself confounded by a recent phenomenon – Falling gas prices. From passing conversation to national news, cheap gas seems to be making headlines everywhere. And while falling prices might mean good news for the average consumer, the ensuing consequences of cheap oil weigh heavily upon my thoughts.

At a time when we can literally observe our global impact and in a country where the only decent economy is a growing economy, our continued dependence on fossil fuels seems quite the foolish pursuit. According to NASA, global atmospheric CO2 concentrations have risen from 280 ppm in pre-industrial times to 400 ppm today (1). As a result, we are witnessing a global transition into an alternate state. One where sea level is high, weather unforgiving, and life impaired. Why then are oil prices dropping? Furthermore, how long can they continue to do so?

Over the last several weeks I’ve sought answers to these questions. In my investigation, I discovered the reasons for falling gas prices. I explored the future of oil and studied the projections of several leading environmental organizations. What the science tells is both old news and new, but the realities we face are immediate and undeniable. What then, are the reasons for falling gas prices? As it turns out, there are quite a few.

From wavy investment patterns to geopolitical affairs, and even extreme weather events, the price of oil is constantly being appraised. And as we further our understanding of anthropogenic climate change, the price of oil will eventually be influenced by climatic conditions as well. The price determinants of oil are therefore wide-ranging and in constant motion. To simplify though, the many factors at play can be roughly categorized into three groups: economic, political/social, and environmental. From each of these groups, I have identified what I believe to be the primary causes for current oil prices.

Firstly, oil exploration and production is entirely dependent upon investments. Investments are put forth on the basis of expectation and with the purpose of generating profit. If prices are high and predictions are positive then investors invest. That wave of incoming capital results in improved infrastructure and increased production. Too much investment though can result in overproduction and an eventual drop in prices.

Overshoot is commonplace in economics and an oversupply of oil can occur if investors are overambitious. As it turns out, the S&P 500 Oil and Gas Industry Index shows a steady climb in investments throughout the last year (2). Subsequently, the S&P Index also shows a drop in investments right around the time gas prices began to fall. (In order to offset overshoot, investors will typically reduce their capital inputs into oil production). Based on these trends, we can at least partially attribute falling gas prices to economic overshoot.

In addition to economic influence, oil supply is also subject to political and social conditions. While more and more oil is being produced, fewer countries are producing that oil. Therefore, political turmoil of any sort can have an enormous impact on oil supply. Concurrently, the transition to more efficient energy production is lowering per capita demand for oil, especially in developed countries. Thus, political and social behavior is a major consideration in pricing of oil.

Current oil prices, in part, reflect the ability of politics to influence supply and demand. In November of 2014, the Organisation of Petroleum Exporting Countries (OPEC) failed to reach an agreement on production curbs (3). As a result, production levels soared, sending oil prices plummeting. Since June of 2014, oil prices have now dropped by more than 40% to less than $70 a barrel (3). Coupled with economic overshoot, recent political behavior has encouraged an additional jump in supply and a consequential drop in prices.

Finally, just as the global market has begun to falter, the U.S. has become the world’s largest producer of oil. With the advent of new fracking techniques, oil is now cheap and abundant in the U.S. and global supply continues to grow. Being that the U.S. does not export any of its crude oil, there exists a surplus of fuel in varying forms and the recent growth in American oil production has, in effect, nullified its gas imports (4). As a result, American gas prices are at their lowest point in years.

So from economic, to political and environmental reasons, the recent trend of falling gas prices basically boils down to the issue of oversupply. As consumption climbs though, and investors allow the scales to balance, the issue of oversupply will eventually subside. And so the oscillating pattern of supply and demand will forever continue, with prices high one semester and low the next, until we are one day forced to confront the realities of climate change, or we run out of oil altogether. The question is, which will come first?

Following the Oil Crisis of the 1970s, the public began to view oil as a finite, nonrenewable resource. For years, there was concern that peak oil production had passed and that prices would forever rise into the future. Strangely enough though, prices are down and proven oil reserves only continue to grow. In 2013, OPEC estimated there to be 1,490 billion barrels of proven oil reserves (5). According to the IPCC, that would take nearly 70 years to burn through at current rates (6). While peak oil is certainly a concern, making the transition to alternative energy is (based on the abundance of oil) not the most pressing concern for many lawmakers.

Confronted with the realities of climate change though, the concern is no longer having too little oil, but having too much. While we may not run out of oil in the near future, we will certainly have to contend with hunger, mass displacement, resource scarcity, and many other unfortunate consequences of climate change.

Considering that global atmospheric CO2 concentrations are at their highest point since the early Pleistocene and that there is only a finite amount of oil in the world, there is inevitably some point in the future where oil will become obsolete. It is then up to us, the consumers, the constituents, to make the difference. We all have the ability to use less and contribute more to a sustainable future.

As our population grows and the effects of climate change manifest, we will eventually be forced to make a decision – Do we carry on blindly down this short road of oil dependency, or do we make the switch to more efficient alternatives? The answer seems obvious. The future of oil is played out; it is one of high prices and higher risks. The physical, environmental, and economic limits of oil are present and passing and soon we will see a global transition to renewable resources. So, in response to falling gas prices, I say they will not last. The choices we make today have the ability to transform tomorrow, and low prices only encourage the consumption of – and dependence upon – a finite and perilous substance. To deny the effects of fossil fuel dependence is to write our own fate. So, in consideration of these realities we face, I implore my readers to use less, study often, and share more.

References

  1. Global Climate Change: Vital Signs of the Planet. Web. 20 Jan. 2015.
  2. “S&P 500, Treasury Yields, Oil – Trading Range Patterns.” Bespoke Investment Group. 6 Jan. 2015. 10 Feb. 2015.
  3. “Why the oil Price is Falling.” The Economist. 8 Dec. 2014. Web. 9 Feb. 2015.
  4. Helm, Dieter. “Peak oil and energy policy – a critique.” Oxford Review of Economic Policy, Volume 27, Number 1, 2011, pp. 68-91. Web. 11 Feb. 2015.
  5. “OPEC share of crude oil reserves.” OPEC. Web. 12 Feb. 2015.
  6. “Petroleum Fuels.” IPCC Fourth Assessment Report: Climate Change 2007. Web. 14 Feb. 2015.

 

 

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