The last time gas prices were this low, the United States and most other developed countries were in the midst of the global financial crisis in 2008, one of the worst economic crises of the last century (BEA). Several economic forces acting in concert reduced demand for gasoline. The national unemployment rate was steadily marching toward 10% (BLS) and the national poverty rate was on its way north of 15% (U.S. Census). State and local budgets were cut, leading to reduced local government service provision and local employment. The financial crisis evolved into a foreclosure crisis, as many families were not able to pay the loans banks had given them. Housing prices dropped sharply (FHFA), further reducing a valuable source of wealth for many families. All of these factors negatively impacted families’ finances and so they took fewer vacations, engaged in fewer recreational activities, while businesses did more conference calling and less in-person meetings. Less travel means less demand for gas. When fewer people want something, it is in essence less valuable and so the price drops. Less demand for gas forced the price lower and lower.
But why are gas prices so low today? While the economy isn’t exactly booming, it has been steadily growing for the last half-decade (BEA). The national unemployment rate is back within the range of historical norms (BLS) and some economists are predicting this will start to drive up wages in the coming year. Consumer confidence is rising and is now near its mark before the Great Recession in 2008 (Federal Reserve) So what gives?
We have to remember that demand is only half of the equation that determines prices, the other is supply. So while there hasn’t been a dramatic change in global demand for oil over the past year, there has been a dramatic change in supply. What kind of change in supply would have the same effects on gas prices as the Great Recession? Something pretty dramatic. Technological
breakthroughs in hydraulic fracturing and horizontal drilling methods now allow drillers to reach into shale formations thousands of feet below the Earth’s surface to extract large new reserves of oil and natural gas. The largest expansion in oil production from shale has happened in the United States, which last year passed Saudi Arabia as the world’s largest oil producer. Most of the oil drilling is happening in Texas and North Dakota, but Ohio has produced some oil as well. However, the bulk of shale activity in Ohio is mostly producing natural gas. For a cool map that visually shows the expansion in U.S. oil drilling over the last 4 years, check out this link.
How long will low gas prices last? That is a difficult question in the longer term. Oil is produced and consumed across the globe and so many complex factors affect supply and demand. We know that oil drillers in the U.S. have stopped drilling new wells because the price of oil is so low. Extracting oil from thousands of feet below the Earth’s surface is expensive and if oil prices are not high enough, drillers have to wait to start producing new wells again. However, most analysts believe gas prices will remain low for the next several months . Low gas prices won’t last forever, but in the meantime, enjoy the extra cash in your pocket. It is a great opportunity to pay off some debt or build up your savings. For some tips about paying off debt or saving more, check out these links:
