As Gas Prices Fall, Americans Weed Off Their Oil Addiction

December 30, 2014 2 Comments

Will lower gas prices truly lead to extra consumer spending? According to most economist, that would make the most logical sense. As oil prices drop, Americans consumption less oil. As Americans consume less oil, consumers spend less money on gasoline and the extra savings will be diverted towards other things. But what if we are already consuming less oil, and are not expected to increase that consumption for years to come?

For the past 5 months, we’ve seen more than a 50% drop oil futures, especially the global benchmark, Brent Oil and Light Sweet Crude Oil futures.

Monthly Chart Sweet Light Crude Oil

This has translated into a lower price consumers pay at the pump for gasoline of all kinds.

Chart: Monthly Gas Prices Since 2004

Of course, the weekly average right now is $2.39 a gallon (week of 12/29/14), but the point is a lower cost per barrel of gasoline, as well as lower prices at the pump, should lead to more oil consumption. The problem is this hasn’t happened as of yet. 

Chart: Oil Production and Gasoline Barrels Sold

Granted, this all happened within a relatively short period of time, but this was (or rather, is) bound to happen sooner or later. Given that we have managed to produce more oil than we’ve ever had since the early 80s, oil prices (as well as gas prices) have no where to go but down. This should encourage consumption on all types of gasoline, in most states of the economy. For whatever reason, according to the Energy Information Administration, Prime Supplier Sales Volume has barely budged. Also refineries have barely moved any units in terms of number of gallons sold for the last couple of months, especially compared to previous years.

Putting it all in perspective, before the recession, Americans consumed at least 61,000 barrels of gasoline per day. In 2014, Americans consume 1/4th of that amount. Aside from surging prices, stagnant incomes could have deterred drivers from spending money at the pump. So these recent drops in prices is practically a daily Christmas in terms of savings, but we don’t see too many people taking advantage of this. There are a couple of reasons why Americans have no use for more oil, and here are a couple of my favorites.

  1. Cars are becoming more fuel efficient.
  2. People are migrating to urban areas and utilizing more public transportation.
  3. People have no where to go, because they have no jobs to go to (retired and/or discouraged workers).

While its great that we are closer and closer in becoming more energy independent, as well as becoming a net exporter of crude, it may be because Americans aren’t utilizing their potential as an energy independent nation. One has to wonder what happens when this oil tax break Americans are experiencing don’t show up in PCE numbers (aside from resources being allocated into Health Care expenditures)? Unfortunately, people don’t realize a good thing they’ve got until its gone. While we may have $57 dollar a barrel oil and $2.32 a gallon gas, it’s not likely to stay that way in the near future.

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