Skip to content

Low Oil Prices Will Lead To Higher Prices

February 23, 2015

Great read today.

Over the past six months, 53% of vehicle purchases in the U.S. were light trucks or sport-utility vehicles, which tend to consume more gas than cars, according to Commerce Department data. That was the highest share in a decade and up from 51% last June, when oil prices peaked for the year. The Transportation Department estimates Americans drove more than three trillion miles in the 12 months through November, the most since mid-2008 and the biggest annual increase—38 billion miles—in a decade.

Earlier this month, the Organization of the Petroleum Exporting Countries reversed its forecasts that energy consumption would decline with the weakening economy. Instead, the lower prices will boost consumption of OPEC oil, the cartel said.

“In 2008, prices fell sharply starting in the summer with the onset of the financial crisis and the global economic recession, which also led to a deterioration in demand,” the OPEC report said. “This time the sharp fall in prices has been mainly driven by excess supply. As a result, lower prices are likely to help to accelerate the pace of oil demand growth this time.”

Few experts see demand increasing so quickly that oil prices rise rapidly. More likely is that some oil producers will be unable to achieve a profit with oil prices so low, and they will curtail production.

“Historically, the initial response of consumers is to increase purchases of other items rather than use more gasoline,” said James Hamilton, a University of California, San Diego, economist who specializes in energy economics. “That is why most of the short-run adjustment in oil markets will have to be on the supply side, as high-cost producers are forced out. And until that happens, low prices will continue.”

Comments are closed.

%d bloggers like this: