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What Do Fluctuating Gas Prices Really Mean?

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Fluxing gas prices have prompted many Americans to take a newfound interest in gas-related economics, both out of sheer curiosity and prudent planning. For instance, if planning for a road trip ahead by several months, it’s useful for budgeting purposes to calculate the cost in gas. The constant fluctuations can make an estimation like this difficult, especially with market manipulation playing a role. What consumers do know is that they’ll take advantage of gas prices while they’re cheap.

Specifically, these dirt-cheap gas prices are having significant impacts on the auto market, including prompting consumers to consider purchasing less gas-efficient vehicles. So, how long can we expect gas prices to remain low? What’s the cause of all it? When trying to find the meaning behind fluxing gas prices, these are common questions among consumers.

The Short Appeal of Cheaper Gas

Upon first look, cheap gas only looks good. Less money that you have to spend each month to get around? Sounds great! While this results in a short-term positive, it can overshadow economic concerns. As is the case with many fluctuating industries, supply and demand plays a large role.

In short, there’s a lot of oil supply and not as much demand, especially with fuel-efficient cars rising in popularity. Combine this with a global overproduction of oil – thanks in large part to Nigerian and Algerian oil competing for Asian markets and the producers dropping prices as a result – and it has resulted in a fairly steady low gas price the past year or so, hovering around $2 per gallon in many places, which is a big difference compared to 2011-2014, where consumers saw prices between $3-4 a gallon.

The Role of OPEC

The Organization of Petroleum Exporting Countries (OPEC) plays a significant role in stabilizing falling gas prices, with the organization being comprised of countries producing 40 percent of the world’s crude oil. OPEC’s fast rate of production has prompted many countries to plead for a slowdown in production, a request that OPEC refused, an action representative of the oil’s large supply.

Iraq’s oil minister Adel Abdul Mahdi summed up the feelings of many international leaders on the issue, explaining that OPEC shouldn’t sacrifice its part in the market. Since Americans and Russians “don’t have any ceiling, why should OPEC have a ceiling?”

Massive Savings for Most

Lower gas prices saved consumers $115 billion in 2015, so it’s easy to see why consumers aren’t exactly complaining. It was a major decline in one year alone, as the drop of an average $2.40 a gallon in 2015 from $3.34 is very significant and has resulted in savings amounting to $550 per driver, on average. With economic concerns in the U.S. and other countries, it can at least be seen as a timely opportunity to put cash back in people’s pockets.

The Impact on Inflation

Economists point to a strong connection between cheap oil and inflation, specifically in regard to how oil plays such a large role in world economics. Wall Street Journal national economics expert Josh Zumbrun explains that lower oil prices boost GDP and consumer spending, while lowering overall inflation. Things will level off eventually and consumers will get accustomed to these lower prices, though the slow inflation these prices are causing could result in deflation. This can result in many job losses and people defaulting on their mortgages and loans.

This would cause banks to suffer and the entire economy as a result. Inflation is a good thing when there’s an in-between: Too much or too little is detrimental, with the Federal Reserve aiming for a consistent 2 percent rate. 2014 saw a 0.4 percent rate and 2015 saw 0.5 percent, so it’s not at the rate the Fed wants, especially with declining oil prices contributing to the likelihood of deflation, which can result in a recession.

With all of these economics at play, it’s very difficult to predict something like what gas prices will be six months from now, especially with oil barrel price increases on the potential horizon. Still, all we can do for now is enjoy the cheap oil and be aware of optimizing oil usage throughout the seasons, knowing that the oil economy is impacted more by global politics than the single consumer. If you’ve always wanted to take a road trip across the country, now’s the time to do it!

Photo Credit: Mike Mozart via Flickr

Megan Nichols's picture

Thank Megan for the Post!

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