OK, I won’t pretend to know a lot about the oil market…I’m pretty much the same as any other average American out there when it comes to oil. I see the gas prices are high, attribute that to high oil prices, and blame OPEC. However, recently I am seeing a trend, as we all are I’m sure. Gas prices are dropping…rapidly…very rapidly in some cases. In my hometown gas is an average of $2.50 a gallon for regular unleaded. I haven’t seen those kinds of prices since June of last year. In a matter of days gas prices have dropped anywhere from 50 cents to a dollar or more. That’s the groundwork of this entry.
Today I read a news article stating that OPEC is going to reduce oil production by about 1.5 million barrels in an attempt to stimulate plummeting gas and oil prices. Their theory is if they reduce production, demand for oil will skyrocket again, and put them back into their little happy places of ungodly amounts of money.
Now logically, to me anyway, that doesn’t make sense. Production does not drive demand in the oil industry…demand drives production. The proof of that is right in that same news article. Here’s my reasoning for this. When gas prices began to reach the astronomical stage, many people, including myself, began looking for serious ways to reduce their need for fuel. Whether it was by working from home more often, taking less trips, carpooling, what-have-you. Myself? I moved closer to work and bought a house, effectively cutting my commute by 95%. I also began combining as many trips as I could together into one outing. Whether it be to grocery store, work, whatever. The results of all of these people taking these steps to reduce their usage of gas are that demand for oil and gas has decreased. I’m not the only one who saw this trend either. Richard Heinburg wrote this article detailing exactly what is happening in the oil industry right now. The kicker? He wrote this in July of this year, well before this recent trend of plummeting gas prices.
Heinburg’s words in the article make sense. We’re seeing this happen right now with oil and gas prices. But…there’s always one…we still have a problem. At least according to Heinburg. This is part of his explanation: “It sounds bad, but that’s not the problem; the problem is this: once the price falls by any significant amount, demand will just pick back up again and we’ll be right back where we are now—with prices aiming for Alpha Centauri.” (Richard Heinburg, “Want Cheap Oil? Reduce Demand!” 07/05/2008)
Now that makes sense to me also. It’s a never-ending, vicious cycle because of the basic fact that when we are getting something cheap, we want more of it for that same price. I’m wondering though if we could prevent this from happening. Since most of us have learned how to live and make do with less, shouldn’t we continue to do exactly that? Instead of ramping back up to our previous consumption levels (and I’m talking everything here, not just gas) shouldn’t we keep restricting ourselves with the limits we’ve set to combat our need for everything we’ve given up? If you’ve learned to live without that extra trip to the mall, or carpooling to work, or spending less so you have more money for what you need, shouldn’t you keep doing exactly that? It’s not that difficult to reason out. Keep cutting the corners and you will keep prices on everything from skyrocketing because by setting and sticking to those limits, you have reduced demand for those things. Less demand = less production = lower prices.
Perhaps if all of us keep sticking to those limitations we’ve imposed on ourselves to combat the impact of the price of oil and gas on our bank accounts, we can avoid the possibility of putting ourselves right back where we started. With the price of everything pushing the astronomical stage.
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