Why Are Gas Prices Going Down?

by Deb Cupples |  It make no sense.  In my North Florida town, gasoline prices were in the $2.90s in April; now, gas is in the $2.70s.  What happened?

Back in 2007, gas prices were near  or above $4 a gallon nationwide.  The public-relations people paid by oil companies habitually blamed it on "supply and demand" (i.e., lower supply or higher demand automatically caused higher prices).

Fast forward to 2010: on or about April 20, a BP oil well exploded and started spewing oil into the Gulf of Mexico.  Thousands of barrels of oil have been flowing into the Gulf each day, but the estimates vary.

According to McClatchy (May 19), BP's oil spill was causing a loss of about 95,000 barrels or 4 million gallons of crude oil each day.   According to the New York Times (June 10), the flow of oil into the Gulf was 25,000 to 30,000 barrels (1+ million gallons) per day.  According to the New York Times (June 15), the flow of oil was "as much as 60,000 barrels" (or 2.5 million gallons) per day.  According to Reuters, an internal BP company document states that the worst case scenario (depending on whether a piece of equipment malfunctions) is that up to 100,000 barrels (or 4.5 million gallons) of oil may flow into the Gulf.

As late as June 18, BP's own estimate was that the flow of oil into the Gulf was under 5,000 barrels per day.

Whichever estimate is more accurate, the fact remains that our nation's oil supply will decrease because of BP's massive oil spill.  Thus, according to notions of "supply and demand," oil and gas prices should be going up (even if only due to market speculators' anticipation of the decreasing supply).  Yet, gas prices in my area have been going down.

What gives?   Again, Oil company executives have habitually attributed climbing gas prices to  "supply and demand," implying that price hikes are caused by some natural force beyond their control -- the way physicists might attribute a falling satellite to gravity.

Recent declines in gas prices make one wonder whether oil companies have always been forthright about what causes gas prices to increase. 

Perhaps "supply and demand" played a significant part in some gas price fluctuations.  Perhaps a stronger factor was oil executives' fundamental desire to funnel more consumer dollars into their own pockets.

How can we know what to believe?

Comments

[Steve Bandoh]

Sorry to burst your bubble but the market is still working like it's suppose to (Although I find it odd that you manage to complain even when it's working in the consumers favor). I'd suggest reading the business section of your favorite newspaper/online news source because outside of the big BP oil spill headlines there's slightly less sexy things like the oil index, currency market news, & other market related articles/info that help broaden your perspective. I'd suggest clicking this link http://www.google.com/finance?q=INDEXAMEX%3AXOI.X and playing around with the 1month, 3month, 1year, 5year, ect.. zoom tabs so you can get a better picture of what the oil index has been doing over those periods of time. Overall the index has been way down since 2007,2008 levels and in the short-term started tanking back in March (although it's gradually creeping back up again). Additionally, outside of the BP headlines the budget crisis in the EU has helped strengthen the US$ against other currencies making it relatively cheaper for us to import foreign goods. The price of oil per barrel also hasn't been near the $100/barrel we saw a few years back. Overall as bad as the spill is when you think big picture considering all of the above, the amount of oil reserves our nation has (around 360million+ barrels), and the relatively short amount of time since the spill started and now it's such a small drop in the bucket that prices won't be affected nearly us much as say a hurricane that shuts down a whole region of oil rigs would. If the spill continues on in the long-run @ it's current rate the numbers very well might change. So sorry but it makes perfect sense. While theirs not much of a conspiracy going on here I would be interested in hearing you take on the peak oil crisis.

"Spurred in part by falling crude prices, gas prices fell 20.51 cents in the past five weeks.

In short, demand has been down and supply has increased, leading to drop in price, Lundberg said.

"An imbalance between supply and demand is in favor of consumers," she said.
Persistent unemployment and underemployment has contributed to the decreased demand, while refineries have been churning out more gas because they are hungry for sales, Lundberg said.

However, in recent days, crude prices have increased. If they continue, it could stop the downward slide of prices and even increase them, she said."

http://www.cnn.com/2010/US/06/13/gas.prices/index.html

[Deb]

How do you actually know that (convenient) theories of the people you've quoted actually panned out in reality? They said it's so, therefore it is?

Take this quote: "'An imbalance between supply and demand is in favor of consumers,' she said."

Does that make sense to you? What does an "imbalance" mean? Is that when supply is up and demand is down? When demand is up and supply is down? Is it when both supply and demand are up (or down)?

The text that you've quoted certainly doesn't clarify, so how do you even know what the intended meaning is--let alone whether it's accurate?

[Steve Bandoh]

Haha are you serious??? Sorry the article doesn't put on the baby gloves and explicitly walk you through it's intent but you learn that kind of stuff in high school economics. An imbalance occurs when there is either a surplus or a shortage. Now when producers are incorrect in their forecasts and overshoot the actual level of demand in the market the net result is more of product X than consumers are willing and able to demand. When there's a relatively greater quantity of a good on the market than consumers are demanding it puts downward pressure on prices until it reaches a level where consumers are consuming the same amount that is being produced. Just like the after Christmas sales that stores have, they have excess product and in order to move it they must mark it down to spur demand. The opposite occurs when consumers demand more of product X than producers are willing and able to produce. Again I'll use the Christmas example except this time we're talking the bidding war that goes of for the newwest "IT" toy. Since there are more people demanding toy X than stores can actually supply the price get's big up. If you'd take the time to LOOK at what the market has been doing not just in the past 5weeks but past couple of months/years you'd see how shallow your assertions are. From the nature of your reply I can tell you didn't bother taking the 15secs to click the link I gave you or do any substantive market research of your own. All you did was take a snippet of the quote I posted, ignore the facts, then somehow create a half thought out conspiracy theory. A certain degree of skepticism of the powers that be is healthy but Deb really? In the big picture BP's losses from 1 rig (while devastating to the environment and coastal economies) is barely a blip on our oil supply radar. Even if it did matter are you implying that the same GREEDY oil execs you accused of price gouging have suddenly changed their tune and are intentionally taking a loss?, or are you implying that all the domestic gas companies have uniformly decided to drop their prices as a show of penance for the mistakes of their biggest competitor? Honestly, either way you cut it your story makes no sense. If you want an oil scam you might want to look into the peak oil crisis, but using oil figures out of context and passing it off as proof the LAW's of supply and demand don't exist is moronic. Especially when there are mountains of data that speak to the contrary. Turn off the headline news and check out the finance section before you pretend to have a clue what you're talking about.

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but usually the price of the gas always goes up. LOL

[Steve B]

....and your point is? Lol I don't know what else to tell you but do your homework. Once you get a clue you'll realize how ignorant this all looks.

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