As a kid, I took rising gas prices as a sign that I was getting older, like getting taller and growing gray hairs. Low gas prices have me feeling nostalgic, with the current rate of roughly $1.82 a gallon in Milwaukee reminding me of my childhood. Together with a new Star Wars movie coming out soon and rumors of a Bush run for the White House circulating around, it may feel like the ’90s again, but it is important to note that low gas prices won’t last forever.
Like everything in economics, lower gas prices are the result of supply and demand. Supply-wise, the amount of oil in the economy has risen due to new technology allowing for the exploitation of previously unusable oil reserves, such as shale. In addition, countries including Iraq and Russia have seen record increases in production, even in the face of political instability and war. OPEC’s decision to not cut production, even at the insistence of some of its members, is a sign that production will remain high in the foreseeable future. On the flip side, a decrease in demand for oil has been compounded by a recent slowdown in the growth of the Chinese economy. To put it simply, oil producers are drilling more than the world is buying.
Low oil prices are typically seen as a boon for net oil-importers like the U.S., especially for consumers and small businesses. Cheap oil not only benefits drivers at the pump, but also companies, such as food producers, that spend a lot on transportation costs. With more spending money, discretionary spending among consumers is also expected to rise.
However, despite the confidence brought about by low oil prices, consumers should not be quick to make decisions based on a number that has been proven to be incredibly volatile. Five years ago, GM phased out its Hummer line following years of declining sales amid rising gas prices, but today, some dealerships wish the “civilian tank” would return. After years of hype surrounding hybrids and electric cars, the good ol’ SUV is once again becoming Americans’ vehicle of choice. If history is any indicator, however, expect some good deals on used 2015 Ford Explorers in the near future.
Contrary to popular opinion, gas prices are largely independent of whatever the president or Congress does. While President Obama’s approval ratings will likely rise as prices drop, it will be interesting to see how he (or his successor) will deal with the inevitable reversal. At less than $50 a barrel, oil is just not as profitable as it needs to be for many. Already, the American energy industry, which for many years was the fastest growing sector of the U.S. economy, is experiencing layoffs. Given time, the market will begin its eventual return to equilibrium and prices will rise.
Consumers should enjoy the benefits of low oil prices while they last, but understand the importance of ‘while they last’. As the generation that came of age during the Great Recession and sings along to songs about thrift shops, we should already know the value of looking ahead and thinking practically about the future.
