The last time anyone in the U.S. paid less than $2.10 for a gallon of regular gasoline was in May 2009 — until now. Global demand for oil has softened in recent months as production has grown, creating a surplus that has driven down prices across the board. As a result, consumers in many parts of the U.S. — such as the Midwest and Gulf Coast — are even paying less than $2.05, according to GasBuddy.
And with the holiday season in full swing, lower prices at the pump are boosting consumer confidence: The Thomson Reuters/University of Michigan’s Preliminary Index of Consumer Sentiment for December registered 93.8, the highest since January 2007. The experts WalletHub consulted on the topic of this report predict that this rise in consumer confidence will fuel holiday sales as well.
But while consumers have welcomed the extra cash in their wallets, the price collapse of oil has also prompted some important questions: Why the steep and sudden drop? How long will this trend last? And what impact will it have on the world economy?
Causes & Effects of the Oil Price Nosedive
This past summer, a barrel of oil was priced at $105. Today, that figure has dipped down to the mid-$50s, bringing down the cost of gasoline along with it. Increasing supply and declining demand are the most basic explanations for this abrupt decline.
But there are other, more specific reasons for the price slump. In the U.S., auto fuel efficiency standards have improved and domestic oil production has skyrocketed by 70 percent since 2008 with the help of the shale oil boom. We’ve also seen a dramatic strengthening of the dollar. Meanwhile consumers in Europe, Japan and China have simply cut back on their oil dependence in response to their slowing economies.
More recently, the Organization of the Petroleum Exporting Countries, better known as OPEC, decided not to cut oil production despite the price decline -- thereby escalating an economic game of chicken among the world’s largest oil producers and putting certain OPEC members, such as Venezuela and Ecuador, in significant economic danger.. Some theorists assert that OPEC — which currently produces about 40 percent of the world’s oil supply — is keeping prices down to combat the Islamic State or hurt their American competitors responsible for the rapid growth of shale production.
With that being said, most of the experts that we consulted agree that the price slump represents a net benefit for the U.S. economy. But “It depends on what part of the U.S. you are talking about,” said Peter R. Hartley, an economics professor at Rice University. The price slump hurts the energy sector but help consumers, he explained.
Some experts expressed additional concerns. Among those experts is William D. Lastrapes, an economics professor at the University of Georgia. “One potential negative is that lower oil, and thus gas, prices may lead to more driving, bigger cars and an increase in the consumption of fossil fuels, which could have a detrimental effect on the environment,” he said.
The Future of Oil Prices
According to the International Energy Agency’s Oil Market Report for December, global oil demand in 2015 will decline by 230,000 barrels per day, from 1.2 million per day to 0.9 million.
This outlook of less consumption supports the general consensus that oil prices will continue to fall in the future and possibly bottom during winter — dropping to $50 or even $40 per barrel, in accordance with WalletHub’s economic predictions for 2015.
Some experts, however, offered no forecasts. “Predicting short run oil price movements is a guessing game, but in the longer run the price levels are driven by the production costs of the most expensive sources of oil needed to meet demand,” said Matthew S. Lewis, an associate professor of economics at Clemson University.
Hartley argued that the future of oil prices is “more an issue of politics than economics. The decisions of OPEC governments is obviously critical. It seems from Saudi statements and marginal producer costs that something like $65 per barrel is a longer-term floor at current demand, but prices could well undershoot this in the short term.”
Ask the Experts
To expand the discussion, we turned to a panel of experts from various disciplines, including economics, engineering, environmental science and business. Click on the experts’ profiles to read their bios as well as their responses to the following key questions:
- How far will oil prices fall, and when do you expect them to bottom?
- Are lower oil prices helping or hurting the U.S. economy?
- Do you expect more robust holiday spending in light of the savings that consumers have derived from lower gas prices?
- To what extent is the plummeting price of oil a result of / an attack on the resurgent U.S. domestic energy market?
- What do you make of OPEC’s strategy, especially considering the dire financial straits some of its members are in?
Ask the Experts