The holiday season is here and travelers filling up at the pump should be enjoying their first Christmas gift in the form of lower gas prices. AAA's Fuel Gauge Report shows that the average price of a gallon of gas was an even $2, lowest since 2009, compared to $2.48 on the same day last year.
Besides encouraging drivers to use their cars more, low oil prices are changing people’s lives in many ways.
By reducing the cost of diesel for truckers, the cost of transporting goods from one part of the country to another have been dropped and this is reflected in cheaper consumer products. Especially during this time of year, cheaper prices mean more spending which is good for the economy.
At the same time, low oil prices are keeping down the cost of home heating in frigid climates, putting more money in the consumer’s pocket and encouraging additional spending while further spurring economic growth.
Besides encouraging drivers to use their cars more, low oil prices are changing people’s lives in many ways.
Investors Unsatisfied
What may be beneficial for the consumer, however, is not something investors would choose to celebrate and lower oil prices are proving exasperating for the markets. The Dow Jones plummeted a whopping 367 points to 17,129 on Friday, capping off its worst two-day slide since August, mostly because oil fell below the critical $35-a-barrel threshold by the end of the week.
Investors are concerned about what the weakness of this commodity is telling them about the global economy. They question why the additional demand in the black gold has not caused an increase in its price and whether this is a sign of a future economic slowdown. They point to the Chinese and Asian economies that have slowed over the last year as an example of what could happen in the United States.
Lower prices have already affected the U.S. economy by hurting jobs in the energy industry and in areas of the country that had been taking advantage of the oil-production boom. In oil-rich Texas for example, 60,000 energy-related jobs were eliminated from the end of 2014 until now, according to one energy economist for the Texas Alliance of Energy Producers.
There is no clear reason why the drop in oil prices continues to be so drastic. There haven’t been any significant signs of an increase in demand for oil worldwide and there have been no meaningful cuts to production so nothing has really changed in the oil market over the past couple of months apart from the price.
For now, the oil glut continues. Saudi Arabia and OPEC have refused to reduce their production of oil while tankers full of the crude sit quietly in the middle of the ocean waiting to be delivered. There are, however, some signals out of Qatar that it may be focusing on cutting costs amid the price decline.
The abundance of slate being developed in the U.S. has not slackened and drillers in the U.S. have in fact added 17 more rigs to the 541 already at work.
In the big picture, Asian markets have better options than U.S. crude. Even with removal of the last restrictions on oil exports, U.S. light oil is economically less viable for most of Asian refiners who are not configured to use light oil. In addition, there is a long charter time and the freight costs involved are higher due to the increased distance the oil has to move. OPEC already supplies the Asian region with oil and it doesn’t seem to mind the steady flow of oil imports to Asia from Mexico, Nigeria and Russia and other oil-producing countries.
Most oil mavens remain pessimistic on oil and don’t see prices coming down anytime soon. And although it's cheaper now than it has been in years, American consumers are unlikely to find new ways to use more of it in the short run unless they buy larger, more gas-guzzling vehicles. According to one analysis, "Until the supply-demand balance recalibrates, you're going to see lower oil prices."