The holidays have come and gone and a new year is upon us. Life is good here in Stony Brook: 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 conversations 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.
As a Sustainability Studies major at Stony Brook University, I am trained to see the world through a holistic lens. I study the interface between man and nature and learn of the global imbalances that we have created over time. From sea level rise, to poverty and resource scarcity, the challenges we face as a result of human behavior are abundant and compounding. So, in response to falling gas prices, I began asking questions. Primarily, why are oil prices dropping? Furthermore, how long can they continue to do so?
These are my findings:
The price determinants of oil range from economic, to environmental and political/social circumstances. 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 typically results in improved infrastructure and increased production.
Too much investment though can result in overproduction and an eventual drop in prices. As it turns out, the S&P 500 Oil and Gas Industry Index shows a steady climb in investments throughout the last year, as well as a subsequent drop in prices right around the time gas prices began to fall (1). (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 controversy of any sort can have an enormous impact on oil supply. In November of 2014, the Organisation of Petroleum Exporting Countries (OPEC) failed to reach an agreement on production curbs (2). As a result, production levels soared, sending oil prices down further.
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. However, the U.S. does not export any of its crude oil, so that surplus of fuel remains local, in effect nullifying American gas imports (3). 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.
As our population grows and the effects of climate change manifest, we will eventually be forced to make a decision – do we carry on down this short road of oil dependency, or do we make the switch to more efficient alternatives? To me, the answer seems obvious. However, it is not so easily attained. In order to move on from oil use, a global effort is required. And as an environmentalist, it is my goal to promote that effort. So, in consideration of these realities we face, I implore my readers to use less, study often, and share more.
“S&P 500, Treasury Yields, Oil – Trading Range Patterns.” Bespoke Investment Group. 6 Jan. 2015. 10 Feb. 2015.
“Why the oil Price is Falling.” The Economist. 8 Dec. 2014. Web. 9 Feb. 2015.
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.