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Oil’s Plunge Could Help Send Its Price Back Up

Oil’s Plunge Could Help Send Its Price Back Up thumbnail

If something is cheaper, people will likely buy more of it. That core principle of economics is proving to be especially true with oil after its recent plunge.

Over the past six months, 53% of vehicle purchases in the U.S. were light trucks or sport-utility vehicles, which tend to consume more gas than cars, according to Commerce Department data. That was the highest share in a decade and up from 51% last June, when oil prices peaked for the year. The Transportation Department estimates Americans drove more than three trillion miles in the 12 months through November, the most since mid-2008 and the biggest annual increase—38 billion miles—in a decade.

Falling oil prices aren’t only a sign of too much supply and not enough demand. The more prices fall, the more people can afford oil, an effect that can goose demand and ultimately help push prices back up. This looping logic of falling prices perplexes forecasters and underscores the unpredictability of the course of oil markets.


“The longer prices stay low, the more you’re going to get a response of people purchasing less-fuel-efficient vehicles,” said Jason Schenker, president of Prestige Economics, a commodity and financial-markets research firm. “It won’t be just the U.S. doing it.”

Oil prices fell and stayed low in the 1980s and 1990s, gradually reducing worries about energy consumption. That fueled a boom in exurban housing developments and left industries less cautious about their fuel use. Economists call this a “demand response.” The changes took years.

“You don’t end up changing your plans today,” said Bricklin Dwyer, senior U.S. economist at BNP Paribas. “There’s a very small effect on short-term behavior, and then in the longer term, it becomes larger.”

New 2015 Ford F-150 trucks on the assembly line at Michigan’s Ford Dearborn Truck Plant in November. ENLARGE
New 2015 Ford F-150 trucks on the assembly line at Michigan’s Ford Dearborn Truck Plant in November. Photo: Getty Images

When oil prices were rising in 2011, the International Monetary Fund estimated that every 10% increase in the price of oil quickly reduces demand for oil by about 0.2%. Over years, people have more ways to adapt: new cars, rearranged commutes, reimagined corporate fleets and different industrial fuel sources. If the increase proves lasting, the change grows to about 0.7%. Economists consider it a clear case of a product whose demand is “inelastic” in the short run—that is, changes relatively little in response to price—but “elastic” in the long run, meaning it can eventually change quite a lot.

Those elasticities work in reverse, too. Instead of the 10% decrease modeled by the IMF, oil prices have declined by about 50%.

The effect is estimated to be slightly larger for developed countries, and smaller in developing countries. All told, demand for oil could rise by 1.25% in developed countries in the short run and 4.7% if the price stays so low.

Also working against the forces that would otherwise dictate more oil consumption is the global economy, which has been weakening in many regions. Many oil experts believe today’s decline in oil prices has resulted primarily from increased oil production, particularly in the U.S. states of North Dakota and Texas, rather than a demand collapse.

A turnaround in demand could eventually help put a floor on prices in the oil market. Benchmark U.S. crude prices fell below $45 a barrel in late January, and have since climbed, ending last week at $50.34. For now, any boost from rising demand has been offset by supply that continues to climb. The U.S. Energy Information Administration last week said U.S. crude inventories have reached the highest level for this time of year in at least 80 years.

Earlier this month, the Organization of the Petroleum Exporting Countries reversed its forecasts that energy consumption would decline with the weakening economy. Instead, the lower prices will boost consumption of OPEC oil, the cartel said.

“In 2008, prices fell sharply starting in the summer with the onset of the financial crisis and the global economic recession, which also led to a deterioration in demand,” the OPEC report said. “This time the sharp fall in prices has been mainly driven by excess supply. As a result, lower prices are likely to help to accelerate the pace of oil demand growth this time.”

Few experts see demand increasing so quickly that oil prices rise rapidly. More likely is that some oil producers will be unable to achieve a profit with oil prices so low, and they will curtail production.

“Historically, the initial response of consumers is to increase purchases of other items rather than use more gasoline,” said James Hamilton, a University of California, San Diego, economist who specializes in energy economics. “That is why most of the short-run adjustment in oil markets will have to be on the supply side, as high-cost producers are forced out. And until that happens, low prices will continue.”

The bad news for oil companies, however, is good news for many consumers around the world, who see less of their paychecks lost at the fuel pump. “Americans are a lot more keen on driving than the Europeans, but nevertheless it does help matters,” said Howard Archer, the chief U.K. and eurozone economist for IHS Global Insight. “The eurozone has been really struggling for growth, and low oil prices are a real help.”


22 Comments on "Oil’s Plunge Could Help Send Its Price Back Up"

  1. Mark Shaw on Sun, 22nd Feb 2015 10:21 pm 

    Look at how oil companies finance the scientists to give false information about global warming.

  2. Plantagenet on Sun, 22nd Feb 2015 11:06 pm 

    When the oil glut ends oil prices will go back up. But for the oil glut to end, either producers will have to cut back or consumers will have to consume more.

    Hard to say exactly when that will happen.

  3. Plantagenet on Sun, 22nd Feb 2015 11:10 pm 


    Dr. Wei’s employers at Harvard should fire him if it is shown that he falsified data and did not report his corporate sponsors.

    He apparently has engaged in unethical and dishonest behavior—most universities consider that to be grounds for dismissal.

  4. GregT on Sun, 22nd Feb 2015 11:57 pm 

    Oil prices are still ~200% of what they were only ten years ago, and ~250% of historical average inflation adjusted prices going back to the 1880s. These articles appear to be nothing more than propaganda pieces to mislead the sheeple into believing that $50bbl oil is cheap.

    It is not.

  5. nubs on Mon, 23rd Feb 2015 12:29 am 

    According to the NYT article, Harvard denies that Dr. Wei is its employee:

    Though often described on conservative news programs as a “Harvard astrophysicist,” Dr. Soon is not an astrophysicist and has never been employed by Harvard. He is a part-time employee of the Smithsonian Institution with a doctoral degree in aerospace engineering. He has received little federal research money over the past decade and is thus responsible for bringing in his own funds, including his salary.

  6. fred1 on Mon, 23rd Feb 2015 2:53 am 

    Plant-agent is nearly always to the first the comment on articles even back in the Oil Drum days. kind of think that S.O.B is a paid shill for the shale/gas industry

  7. fred1 on Mon, 23rd Feb 2015 3:06 am 

    But that’s ok we need people like him to keep the sheeple at bay while we can still get supplies cheaply and stock up . keep up the good work Plant-agent

  8. Makati1 on Mon, 23rd Feb 2015 5:31 am 

    If you have no job, or you cannot pay your debts with the income you have, you do not buy at any price unless it is life a saving need. THAT is what seems to be eluding the so called ‘economists’ in the US. All of the lies they call ‘statistics’ are obvious to anyone that still has two brain cells functioning.

  9. Makati1 on Mon, 23rd Feb 2015 5:33 am 

    …a life saving need…

  10. Davy on Mon, 23rd Feb 2015 5:48 am 

    Mak, what about the Asian economist what are the preaching. They seem to be following the western model. How stupid is that Mak? Asia is a failed continent of population overshoot. The 200MIL excess deaths a year needed to reduce our global population to a global carrying capacity will fall proportionately on Asia. It is going to be one hell of a ride for you Mak.

  11. rockman on Mon, 23rd Feb 2015 6:04 am 

    “…a paid shill for the shale/gas industry.” Damn…you mean someone might pay for the crap I’ve been putting out there for free?!? LOL.

    OK…back to the subject…consumption. It will be interesting what we see happen to gasoline consumption in the US since it’s a good proxy for oil consumption. Especially if it doesn’t follow the same pattern as the post ’08 price crash when the world consumed less $58/bbl oil (avg. yearly price) than $98/bbl oil (avg. ’08 price). Just as US drivers consumed less lower priced gasoline during the period. It’s still too early to be sure but the initial stats as pointed out previously are leaning that way.

  12. paulo1 on Mon, 23rd Feb 2015 7:50 am 

    Misleading information about efficiency.

    My son uses an F-150 for his work as a contractor. A 2014. It is far more economical than my old 4 banger Toyota PU. It uses 4 cyl until 8 is called for, is EFI, computer sensored up the yin-yang, and altogether a much better ride and improvement over my truck which at first glance would seem to be frugal.

    The big difference was sticker price. Mine would sell for $2500. His $40,000. Mine is in every way a cost. His, a deductible expense in a lower tax bracket to boot (being a business). No brainer.

  13. Davy on Mon, 23rd Feb 2015 7:52 am 

    Marm, I am a little worried about posting this because of the anxiety it will cause you. Hopium is a fragile thing even with the steady Feddy numbers to calm the nerves.

    First the architect of the largest wealth transfer policies in human history Alan The Greendog says:

    Alan Greenspan Warns: There Will Be a “Significant Market Event… Something Big Is Going To Happen”

    Then the Marmian message of all is good with oil prices down is smashed:

    Commodities Crushed: WTI Plunges To $48 Handle, Copper Breaks Key Support

    Finally for the Marm and the Planter a little word on the nature of the demand driven oil glut:

    Record Low Baltic Dry Casualties Emerge: Third Dry-Bulk Shipper Files For Bankruptcy In Past 3 Weeks

    I will allow you to discount some of this news as being ZH agenda driven “the sky is falling” BUT can you deny the jest of these reports and the numbers? I am sorry boys the BAUtopian hopium of an economic breakout with growth and prosperity is not holding up……

  14. Davy on Mon, 23rd Feb 2015 8:00 am 

    Paulo, I have two 4banger Toyota Tacoma’s that average 20mpg. One is a 2002 4×4 the other a 1998 2x farm beater truck. I would say from a greenie view these trucks are cheap and the sunk cost to the environment made. I drive very little and both are utilized for specific tasks. The 4×4 is essential in the last weeks because of the snow, ice and cold. The farm beater truck is essential for utility work on the farm.

    Anyway thinking about a new GMC 4 banger diesel Canyon but undecided. A part of me wants to buy my last vehicle of the auto age. I need something bigger for my cattle operation. I have to borrow the neighbor’s truck currently. Anyway Toyota Tacoma’s have a cult following.

  15. shortonoil on Mon, 23rd Feb 2015 8:04 am 

    The more prices fall, the more people can afford oil, an effect that can goose demand and ultimately help push prices back up. This looping logic of falling prices perplexes forecasters and underscores the unpredictability of the course of oil markets.

    For a century and a half oil consumption followed oil production with a few short term ups, and downs. The demand curve followed the supply curve. The reason was that oil has historically always been an economically advantageous commodity to purchase. The value of the oil to the economy was greater than the price of the oil. In 2012 that relationship changed. The price of the oil reached its value to the economy at $104/barrel.

    As a result of depletion the value of a barrel of oil to the economy is going down. At the same time the cost of production is going up. The oil industry is now caught between a rock, and a hard spot. It has a commodity that is declining in value, and price at the same time that the cost of producing it is increasing. The price has declined, and the industry has put every barrel possible into production to compensate for its decreasing cash flow.

    Declining price will not increase price enough to alleviate the problem through increased consumption. The economy is now upper limit price bound:

    In 2015 that is $77/barrel. Because half of the demand for oil is now the product of its production, the supply demand relationship will only come into balance very slowly; it will happen as long term prices continue to decline. Producers will continue to produce at maximum production rates, and consumers will be continually priced out of the market. The present supply imbalance is not a typical historical short term up, and down event. It has no comparison to what occurred in 1986. The underlying fundamentals of oil production, and price have completely changed. It is those fundamentals that will determine the future of petroleum.

  16. green_achers on Mon, 23rd Feb 2015 8:09 am 

    That’s got to be the stupidest headline I ever read. It’s so stupid it’s not even wrong.

  17. Davy on Mon, 23rd Feb 2015 9:14 am 

    Short, what you just said is profound. It is amazing that some may read it and bump along to other news in the typical BAUtopian hopium haze. Sheeples come in all sizes and wealth status. Even the Marms of the world are just BAUsheeples. Soon the herd of sheep will be on the move. This is the type of news that heralds the end of BAU. It indicates a bumpy descent that left the bumpy plateau of 2012 when “In 2012 that relationship changed. The price of the oil reached its value to the economy at $104/barrel”.

    One can try to discount the Hills Group research but the facts and the support are solid. Like any research with predictions we have to allow for the real world to unfold. Yet, this kind of report is startling and should have the entire global system on edge. We should be on edge because of how close we are to the point of no economic contribution of oil to the economy. This state of affairs with the dangerous situation of the ever growing needs of energy to solve problems. It represent the predicament of predicaments at least as far as the brick wall ahead.

  18. bobinget on Mon, 23rd Feb 2015 12:42 pm 

    Not taking ‘oil wars’ into consideration is like
    ignoring ‘climate change’ in long term economic forecasts.

    No matter how great one’s distaste for fossil fuels
    is, there exists no substitute.

    For years ‘gold bugs’ try to convince us, “gold is money”.

    Oil itself is also currency. The obvious, all the gold ever mined is still around on earth.
    More then half (currently accessible) oil is no longer in a useable form. In fact many argue burned up oil is harmful. However, products of of an oil fed industrial economy remain useful. (to a majority)
    Oil is convertible into cash in any industrial society. Therefore oil is a currency.

    If oil is priced in dollars, Are dollars priced by oil?
    Because appearances say ‘there is too much oil’,
    Why is the dollar the strongest (major) currency on earth?

    CAD, as a result of lower oil prices has lost value.

    Why are foreign investors betting on USD and not CAD?

    Rough guess; hedge funds are betting the US economy improves on account of cheap oil and Canada’s diminishes for the same reason.

    (I do believe oil prices will stabilize post some major delivery crisis disruption) Shortonoil might describe another oil inspired war as some sort of “Black Swan” I, OTOH maintain fighting over money is normal among humans.

    Can one be aghast at climate change deniers while
    denying the use of force as a prime method of
    ‘securing’ oil imports? Never mind that initializing
    force also gobbles up lots of energy, to date we haven’t come up with a substitute for either.

    Oil is determined to be essential. The West has decided, it will not be blackmailed by ISIL.

  19. Perk Earl on Mon, 23rd Feb 2015 2:32 pm 

    “The reason was that oil has historically always been an economically advantageous commodity to purchase. The value of the oil to the economy was greater than the price of the oil.”

    When the value was greater than the price, profits, growth, loan origination abounded. Now it’s getting squeezed and to overcome that there have been numerous stimulus programs, mostly resulting in some form of trickle down, benefitting the top .1 while the rest tread water.

    As the cost of oil production continues to rise while affordability drops, we should now be entering a period of serious consequences.

    There are many articles of the number of people just barely holding on financially, living paycheck to paycheck. It would seem to follow that at some threshold of descent, a large segment of the population will become disenfranchised. What happens when say 30 million people are added to the list of destitute over a short period of time?

    IOW, so far things have muddled along to some reasonable fashion with those falling by the wayside not making too much of a fuss or fitting in with other family members. But once a big segment of the population falls and it’s too glaring to ignore, even for the MSM, then what? Should be quite interesting to see what kind of ideas are floated to attempt to rectify the situation.

  20. roman on Mon, 23rd Feb 2015 3:04 pm 

    If the supply of shit goes up buy a bigger toilet.

  21. Davy on Mon, 23rd Feb 2015 3:24 pm 

    Perk, I imagine large population segments but also large population segments in particular locations i.e. Fergusons being disenfranchised. We may see whole areas triaged out of the economy. This is part of my thinking with wealth transfer and canibalization of the social fabric baked into the BAUshortcake.

    I think we are getting close to this time. It is already happening. We are seeing a two level economic reality. At some point the social fabric will rip.

  22. Kenz300 on Tue, 24th Feb 2015 12:14 pm 

    No more wars for OIL …………………..

    Electric, hybrid, flex-fuel, biofuel, CNG, LNG and hydrogen fueled vehicles are the future……

    The oil companies hate that………

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