Relieving Gas Pains

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Were you to tell me a year ago that while driving into work the first week of January I would see several gas stations with prices for regular below $2.00 a gallon, I would have said something along the lines of “In your dreams.”

Had you said the same two years ago, my response would have been approximately the same.

But here we are, in a situation where gas prices due to a number of factors are far lower than anyone outside of the most optimistic would have anticipated.

One of those factors is OPEC, which was a bête noire not all that long ago so far as many outside of the Middle East were concerned. In this case, Saudi Arabia is keeping the oil fields producing at a rather prodigious rate. Presumably, there are political reasons behind that move. They probably aren’t doing this because they think that U.S. drivers really need a break regarding fuel prices.

And while speaking of politics, there is the situation in Russia. The sanctions for the situation in the Ukraine are having an effect on the Russian economy, and the plummeted oil prices are not helping out. No doubt those who are behind the sanctions are rather pleased about that.

Then there is the effect of fracking, which is increasing the amount of oil and gas being produced within the U.S. such that there is a greater abundance of fossil fuels coming out of the ground than anyone—again, outside the most optimistic—would have anticipated a year or two ago.

Another factor is that with the global economy having been not all that robust during the past few years, the amount of recreational driving is down, which has had an effect on demand.

Demand has also been affected by the fact that more vehicles, especially in places like the U.S. and Western Europe, are far more fuel efficient than they were a decade ago. When your car gets more miles per gallon, you need less fuel. There is, of course, the possibility that if your gas costs less you are going to drive more, which probably isn’t having that marked effect on fuel consumption overall. After all, most of us drive when we need to, at least on a daily basis (i.e., unless you live in a car commercial where all roads are apparently sinuous two-lane highways along a sea coast with no other traffic, chances are you drive to work and back, go shopping, take the kids where they need to be, and call it a day), so the likelihood of suddenly saying: “Gee, gas is two bucks a gallon; I think I’ll go on a long road trip after dinner” is fairly unlikely.

One of the consequences of the decline in fuel prices has been an increase in the sales of light-duty trucks. I surely don’t think that the people at Ford are particularly happy with the lower cost of gasoline because the aluminum F-150 starts to be somewhat less compelling from the miles-per-gallon standpoint. Yes, there are points to be made regarding the ability to deal with more cargo and to tow more because there is less mass in the vehicle, but you know that $4.00 a gallon gas was probably mentioned at more than one meeting in Dearborn.

What’s more, the whole hybrid and electric vehicle story starts to be less compelling for those who look at people’s decisions to opt for an alternative powertrain simply predicated on the idea of fuel cost savings. I have a colleague who writes for an investment publication who has calculated the value and valuation of Tesla every which way imaginable, and has concluded (among other things) that Tesla sales are being negatively affected by cheap gas. (My sense of things is that if someone is going to spend +$70,000 on a car, they’re interested in things other than its fuel efficiency. But then, he writes for the financial publication; I don’t.)

There is a danger, of course, that the industry will become intoxicated by the lower gas prices. It isn’t necessary to use the Way Back machine to remember how Detroit was caught flat-footed by the 1973 Oil Embargo, when world oil prices quadrupled between October 1973 and January 1974. That is something that they can’t afford to have happen again.

That time, as you may recall, there was a huge opportunity opened for the Japan-based manufacturers, which were making more fuel-efficient cars. What would happen this time, were the price of oil to quadruple in a short period of time?