As I’m sure you are joyfully aware, average gas prices have been rapidly decreasing over the past few months. The average U.S. price per gallon of gasoline is now $3.05 per gallon, with many regions of the country coming in below that. Hooray! Or… not?
Yes, lower gas prices can have an immediate impact on your finances, in a positive way. Unfortunately, there ain’t no free lunch. Not only are these low gas prices not here to stay, but the actions that we take now are going to impact prices in the near future. And they will come back with a vengeance.
You see, we Americans are pretty damn shortsighted. Low gas prices are like a chocolate chip cookie that someone sets in front of us on our desk in the morning. After looking around to ensure the bait is not a prank and there is no video camera on us for a social experiment, we gobble that shit right up.
And so it is with gasoline.
We don’t just start driving more leisurely and frequently – oh, no. We also purchase bigger, heavier, slower, dumber vehicles as well – large truck and SUV sales have been skyrocketing while alternative fuel vehicle sales have been declining in recent months.
When consumers stay away from the most fuel-efficient vehicles, there is a lack of innovation and investment in new vehicle technology and design. If we keep showing that we’re mice willing to take the bait of big dumb vehicles and temporarily low gas prices, then automakers have no incentive to produce more efficient vehicles.
And just as with the cookie example (think eating a few every day), we don’t benefit from our gluttonous consumption. Increased consumption tears up our roads, clogs are streets, and puts out ever more CO2. And more drive time (and more aggressive driving) results in more driving deaths. It’s been estimated that a $2 drop in gasoline price can translate to about 9,000 road fatalities per year in the U.S.
Furthermore, in buying more gas, we’re really hurting the American economy.
What? That’s ridiculous. More consumption equals better economy, right?
There is an interesting back-story here that everyone should be made aware of (if you haven’t connected the dots already). As the price for crude oil had increased north of the $100/barrel, many U.S. producers got into the shale oil extraction game, because it was profitable for them to do so. This increased investment and production increased output and supply and kept prices reasonable. Seeing this as a huge market share threat, the Saudi’s previously decided to drop their prices to extremely low levels in order to put many of these U.S. producers out of business. Many American companies were profitable at $100+ per barrel and this led to a boom in U.S. oil production. Few, if any, are profitable at $40/barrel.
The state-owned Saudi Aramco is by far the world’s most valuable company. They can afford lower temporary revenue in order to kill off competition and increase their market share.
And guess what – it worked. U.S. shale oil production was almost entirely wiped out and funding for new production completely dried up. Saudi/OPEC market share increased. Then, prices went back up.
So… if you are driving more often due to low prices or plan on buying an all-wheel drive vehicle or behemoth steel monstrosity, you’re only hurting yourself, your environment, and your country.
Related Posts:
I nearly fell into this trap of filling up more so I could take advantage of low prices. But then I thought I don’t need to fill up more I need to fill up less. I only do about 100km per month so I will only fill this amount up. The amount I save will go to a savings account every month so I really end up taking advantage of the low cost fuel. Great post GE, thanks for sharing.
Completely agree. Any savings I make is going right into a savings account. Most people I know are filling their cars up more to take advantage and travelling more as a result so no real savings are being made. These people will be hit hard when prices rise again and they have to make cutbacks. Really enjoyed the post, thanks for sharing GE.
I think you’re partially right – the Saudis are trying to gain more control of the market, and car sales have gone up. However, whether or not those car sales have gone up because gas prices have gone down, or if it’s due to a host of many other factors, is unclear. I also think the general public is more wary about spending money in general, and that there is stillore of a push for newer technologies, more fuel efficient cars, and less money spent from our pockets.
When you look at the trends over time of “large” vehicle sales and the cost of gas, there is little question that they are inversely correlated. [To get all debate on you, it is true that “post hoc ergo propter hoc” (after this, therefore resulting from it) is a fallacy, but the statistical significance of the trend between the sale of low MPG vehicles and low gas prices make it a known correlation.
Yet many Americans will fail to see if in a long term view. I know too many people that are already thinking about buying an SUV or a truck. I, also, know too many people that think driving a big vehicle will increase their safety, and are sadly passing on the same teachings to their kids and grandkids.
I tend to agree with your thesis, but would say that while we may *think* gas prices will inevitably rise, they could also fall (or stay where they are). Point being nobody really knows what will happen in the next 12, 24 or 48 months.
Also, Saudi’s lowering the price to take out domestic oil businesses? Again, that *could* be part of why, but there are many other hypotheses out there as well.
Everything I am reading says that output won’t fall immediately, as anything that has already had R&D completed will continue to move forward. While some of the short-term plays may be put on hold, longer-term producing fields will continue to operate despite the drop in prices.
Also, the Venezuela’s and Russia’s will have to continue to keep pumping out more oil at these deflated prices to keep their economies running, so that could also keep gas prices low for the near future.
All that said, I am playing my cards the same way as you, and hope that others will notice that they can still save money with fuel efficient vehicles despite cheaper gas (it will just help them even more once prices rise). Heck, they are probably offering some great incentives and rebates to move them off the lots!
I love that you are discussing oil prices as this is such a key issue. I come at it from a bit of a different perspective though, as I am an advocate of ethanol as a fuel. I’d rather see folks buying large “FlexFuel” trucks and filling up on E85 (or E100!) than buying hybrid vehicles whose battery production does a lot of damage to the environment too.
There is a lot of misinformation about Ethanol fuel, check out “Alcohol Can Be a Gas” to learn how changing your fuel can cut costs, increase MPG and do all this while improving air quality and local economies!
Two words my friend: “Corn Subsidies”
Which is the whole reason corn is used as the main feedstock for fuel alcohol DESPITE the fact that you can get at least five times the yield from other crops. Corn is the tail wagging the dog.
I highly recommend checking out “Alcohol Can Be a Gas” to educate yourself on the issue. There is a movie (in lecture format) and the entire thing has been posted for free on YouTube (with the Author’s permission).
This is interesting – I have to admit, when it comes to economics, I sometimes have a hard time putting the big picture together, so this was interesting to read – thanks!
I don’t have a car anymore, so normally my thoughts about low gas prices are “Hmm, ok, that’s nice” and that’s about the extent of it. But who knew it would have such an effect on SUV sales in such a short amount of time?! That’s something that kind of blew my mind.
Even when I bought a car, I always went for the most fuel efficient that fit in my price range: whether gas prices went up or down, that was still more savings in my budget I could do other things with.
I’m amazed at the short-sightedness of American public with the increase in SUVs and Trucks. As you’ve said, and most Americans seem to forget, what goes down, comes back up. I’ve owned two Prius, my second is an ’08 with 52,600 miles on it. I will only own a hybrid, and dream is an electric car. Then I’ll have to figure how to charge it without feeding into the nuclear/coal grid… Americans will have to experience a real catastrophic even to change their habits.
It takes more energy to produce two hybrid cars than one I.C.E. vehicle in a comparative class size. Not to mention the amount of pollution created by the DIESEL commercial equipment used to mine the materials to produce the battery packs in hybrids which are then shipped OVERSEAS ON A BARGE before the entire vehicle is shipped back to the states. To G.E. Miller, even though the “manufactures have no incentive to produce efficient vehicles” there are many policies in place for manufactures to meet CAFE requirements in the near future and to have vehicle model lines to meet certain average efficiency criteria. Any thoughts on that?
Sorry, I won’t be calling my Congressman or Woman at all. I will continue to drive an economical vehicle and take advantage of the generous mileage deduction on my taxes.
So far, cheap fuel is the one concession counteracting the ridiculous rise of my out of pocket healthcare premiums.
Poor interperation of the impact of oil on the US economy in the short and long term. Total overreaction. Oil is a market like anything else. It goes up and down. To completely throw in the towel that this is the Saudis winning vs the US is foolish. Deepwater and far more fragile economies cost much more to produce. U.S. is just about a net exporter already meaning production exceeds domestic demand aka energy independence.
Also, so companies respond and cut jobs and this is bad for th economy as a whole? Might want to look at what percentage of GDP oil is on the US. It’s basically creating net reductions in cost for every other industry and putting money in the consumers’ pockets in a consumption economy.
And finally, if it’s so bad then why would your write a Congressman to raise taxes to make the product more expensive but not benefit the companies having to cut the jobs? Dumb.
Agree. GE if you want to write your congressman about anything it should be abolishing/lowering taxes on imported goods. Increasing taxes to make domestic products more competitive is dumb and kills innovation. By increasing the taxes on foreign oil it prevents companies from being innovative. It makes it easier for them to sit back and be lazy because big government will come bail them out if they can’t stay competitive.
I just read an article http://www.iihs.org/iihs/sr/statusreport/article/50/1/1 that 8 models of vehicles last year had 0 deaths per million cars on the road. The deadliest cars to drive were some of your smaller cheaper cars that get the best gas mileage. How many lives will be saved if gas stays cheaper and helps people afford safer cars?
This post should be required reading for all Americans.
Great point about OPEC (not just the Saudis) increasing production to put US companies out of business. They’re essentially an oil mafia, and curiously Saudi Arabia is considered a big US ally.
You don’t hear this on the media, which is sad because it is going to hurt the US economy in the long run. All you hear is this is a “tax refund” (yes many so called reputable financial people in the media have said this) and you can use it to bolster the economy by buying stuff. God forbid we actually save the money.
In reality, the savings aren’t really that much. $50 a month or so for moderate drivers isn’t a huge amount, especially considering it won’t last too long.
I was at the Ford dealership a few weeks ago (getting my $50 test drive) and they agreed w/ me that people have short memories and are gobbling up trucks and SUVs forgetting that gas always spikes in the summer.
SO…summarizing each of your paragraphs above:
Gas prices go down. Americans begin to consume more gas. OPEC increases production (increased supply) to drive gas prices down further to drive out American competitors. At the same time people are buying more trucks/suv’s which increases demand of gas thus causing gas prices to go back up allowing American competitors to again make money.
Sounds like we should all buy trucks so our American competitors can make money.
This was a fantastic read. I agree wholeheartedly with everything you’ve said – except increasing the gas tax. :) I hope this type of logic starts spreading.
I moved to Houston for a teaching job at a fantastic charter school. No, it’s not oil and gas, but we are very generously funded by oil and gas companies around the city. My adopted city has many different industries, but we’re all very intertwined. It won’t be the first time Houston has seen hard times, but it’s still disheartening.
Interesting perspective. I never would have thought about it this way if it weren’t for your post. I have loved the impact on my budget, but I am still budgeting as much to gas as always so I don’t get too used to the low prices. I know they’ll go back up eventually.
G.E.,
Good article with one side of the story.
The U.S. market has an ever increasing age of the average car which over time drives up new car sales as people feel the recession, slow, get promotions or new jobs or a raise for the first time in years. This has created an increase in car sales.
Also, of the vehicles you specifically mention both had interesting times. The Jeep had a rough launch which included a very limited supply of major components (ie. engine and transmissions) so the times stated for sale were from worst to the time that all dealers had an adequate amount…As for the trucks, Ford had to shut down its #1 truck plant to retool for the new model. So there were months that no trucks were being sold. GM and Chrysler took full advantage of this offering discounts, rebates, etc…
So yes, the American consumer generally has a short memory but the change in sales volume of some of those vehicles is not just related to fuel.
While data my contradict me, lower prices make me want to drive less…instead having to fill up more, I can keep my gas budget super low. Since I don’t want to go over it, I only drive for work and bike/walk everywhere else. Its pretty awesome.
I for one am enjoying filling up for $20 instead of $40, especially since we know it’s a benefit that won’t last long. I agree on the shortsightedness of some consumers, though. I just about fell out of my chair when I heard someone being interviewed on the local news about how they decided to get an SUV “since gas is so cheap”. I have no problem with people driving trucks or SUVs, but it’s foolish to make a long-term, high-cost decision (for most people) because of a short-term fuel price drop.
You ran down the job losses of oil-related companies, but I wonder how quickly those jobs will come back. It seems like they fluctuate more than other industries as it is. In the meantime, what is the drop in fuel doing for other companies/industries? If more people are buying SUVs and cars is it helping out Detroit and factories in the south? With fuel prices dropping almost 50% are companies able to do positive things (equipment investments, R&D, more employees) with the money they are saving on transportation costs? Analysis of the flip-side of this coin seems to be missing from the article.
Thanks for sharing this useful information Mr.Miller, I agree with what you written “Furthermore, in buying more gas, we’re really hurting the American economy.”. This is absolutely true.
You must be off your rocker to be in favor of higher taxes. That’s absurd! The mindset of more taxes hasn’t worked too well for states like MI has it.
Our roads are an absolute nightmare. Maybe you could sprinkle some of your magic pixie dust on top to fix them?