Gas prices went down to a national average of $2.38 per gallon this week, or the lowest they’ve been in over a year, according to AAA. Prices then dropped even further by Friday to an average of $2.30 per gallon, due in large part to the coronavirus pandemic and a supply glut. It’s safe to say we haven’t seen anything like this before.
Demand, in this context, is a lot more than just people not commuting to work every day and thus not being so reliant on their cars. It’s what it looks like when much of the world—and especially China—grinds to a halt. Further, a price war between Russia and Saudi Arabia is driving prices down even more as both countries up their output into a softening market that will probably only get softer.
That means there is more oil for a market where demand has fallen off a cliff, which is why many analysts think gas prices will fall further, perhaps significantly so.
This is good news for drivers in the short-term since real wages have been stagnant for decades in America. While any extra money in your pocket can go a long way toward making ends meet, for the long-term, it portends some potential bad things about the economy. Take this ominous sentence from a AAA release on Wednesday:
Although these events have pushed oil prices lower, to the benefit of consumers, continued oil market turmoil and sustained cheap crude prices could ignite further market erosion that leads to a recession.
“Market erosion” means that oil companies could spend less money if they’re taking less in by virtue of the gas price being so low, which could have its own bad effect on the economy, though for now, that remains to be seen.
The situation doesn’t have much historical precedent, in any case, since there are so many unknowns; except for the fact that a lot of crude oil will be generated for a market that isn’t asking for it.
From The Wall Street Journal:
“This is a once-in-history demand shock being met by a once-in-a-generation supply shock going the other way,” said Saad Rahim, chief economist at commodities trader Trafigura. “This virus is directly affecting travel and movement in a way we’ve not really seen before.”
Global oil inventories will expand by nearly 1.4 billion barrels between March 2020 and August 2021, analysts at Standard Chartered estimate. This number of barrels contains enough oil to fill 88,000 Olympic swimming pools, which would stretch from New York to San Francisco if they were lined up in a row.
“Markets are screaming for OPEC not to flood the markets,” said Hakan Kaya, who manages commodity investments for Neuberger Bermann. “The signal is loud and clear to OPEC and U.S. producers: just don’t bring the additional barrels of crude oil—it’s not needed.”
Market volatility like this is never great, per se, since markets prize stability almost above all things. It also doesn’t really matter if gas is super cheap if you have no use for it, like a lot of people right now because of coronavirus. Still, I guess enjoy this while it lasts?