Last week I bought gasoline for $1.96 per gallon and crude oil is about $50 per barrel. It wasn't long ago predictions were made that gasoline would be over $4 a gallon and crude oil would be over $100 a barrel. So what happened?
People adjust. As gasoline and oil prices rose, people began to change their habits by driving less, lowering the thermostat, or driving at the speed limit. Of course, some people change immediately, some take a while and some never change. Thus, there is a lag before there is lower oil usage, which results in lower prices. For reference, the 30 member countries in the Organization for Economic Cooperation and Development (OECD) saw oil consumption drop 0.6% in 2006, the first drop in more than 20 years.
Regression to actual value. Over time, the actual price will get closer to the real value of an item. Recently, this phenomena has happened to gold and to tech stocks (2000-2002) and is currently happening to housing. Eventually, the excesses of the market are absorbed and the prices settle back to reality.
Unusual circumstances. This winter has been unseasonably warm, resulting in lower heating needs. Thus, less oil has been used, resulting in lower gasoline prices.
While I am enjoying the lower gasoline prices, I am not expecting them to go much lower for exactly the same reasons given above. People will start using more gasoline, the decline in prices has likely overshot and gone too low, and summer/winter temperatures will become more normal. For my financial planning, I am using an estimate that gasoline will be in the low $2 range in the near term.
For more on Reflections and Musings , check back every Saturday for a new segment.
Photo Credit: morgueFile.com, John Sense
People adjust. As gasoline and oil prices rose, people began to change their habits by driving less, lowering the thermostat, or driving at the speed limit. Of course, some people change immediately, some take a while and some never change. Thus, there is a lag before there is lower oil usage, which results in lower prices. For reference, the 30 member countries in the Organization for Economic Cooperation and Development (OECD) saw oil consumption drop 0.6% in 2006, the first drop in more than 20 years.
Regression to actual value. Over time, the actual price will get closer to the real value of an item. Recently, this phenomena has happened to gold and to tech stocks (2000-2002) and is currently happening to housing. Eventually, the excesses of the market are absorbed and the prices settle back to reality.
Unusual circumstances. This winter has been unseasonably warm, resulting in lower heating needs. Thus, less oil has been used, resulting in lower gasoline prices.
While I am enjoying the lower gasoline prices, I am not expecting them to go much lower for exactly the same reasons given above. People will start using more gasoline, the decline in prices has likely overshot and gone too low, and summer/winter temperatures will become more normal. For my financial planning, I am using an estimate that gasoline will be in the low $2 range in the near term.
For more on Reflections and Musings , check back every Saturday for a new segment.
Photo Credit: morgueFile.com, John Sense
This is not financial advice. Please consult a professional advisor.
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2 comments:
Where do you live that you get gas for under $2 a gallon? Here in the DC area, we're stuck with it at $2.20-2.40 a gallon.
Even when we drive through central PA, where gas used to be 30 cents cheaper per gallon, gas is the same price as down here.
Clever Dude,
Thanks for your comment and question.
As you point out, not all states have gasoline under $2 a gallon. See the MSN.com article Gas prices start to dip under $2 for details on which (mostly Midwest) states do.
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