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robertwd robertwd
 
December 15, 2008 09:25 PM

Why have gas prices suddenly dropped after hitting such a record high? Is the price swing real or manufactured

I want to know what peoples opinions are and what facts different groups around the country are discussing. How can we accept paying so much for gas and then only weeks later be back to such low prices? While there are hundreds of factors that could affect global demand, it seems almost too drastic for such a range to be possible in such a short amount of time. What do you think?
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trupright trupright
 
 December 15, 2008 09:49 PM
The short answer is that the recession has reduced the demand for oil consumption worldwide. This has caused the price to fall since supply is essentially constant in the short run (in the long run, supply will cut back as well due to low prices).

The long answer: The price for oil is determined by the futures market. When oil was going for $150 per barrel, there was a lot of anticipation that the growth of China, India, and other developing countries' economies would continue to grow at incredibly high rates. With the recession in place, and with economic activity of all kinds falling, the expectation that demand would continue it's very rapid growth proved to be false.

In addition, when oil prices are very high, there is incentive to produce more oil. With the collapse in oil demand, oil producers are stuck with high levels of production that can't be just turned off (it takes time to cap wells and reduce flow). So...lower demand, high supply means low prices.
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garance garance
 
December 15, 2008 09:29 PM
right now: less demand. In the US we drive 4% less because of the crisis.

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vinsont vinsont
 
December 15, 2008 09:31 PM
Sales fell about 40% in the southeastern US. I think this has a lot to do with prices dropping.

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bbnet3000 bbnet3000
 
December 15, 2008 09:38 PM
People just werent willing to pay those prices, so they were lowered. They also led to a backlash of public opinion against the big oil companies.

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taquintana... taquintana...
 
December 15, 2008 09:43 PM
right now the demand has gone down quite a bit since people were mad at having to pay $5 a gallon.Overall the motorists in the US arent driving as much. You also see a trend when the presidential election hits. When a new president is coming in to office the gas starts to fall then a year or two later it goes back up again. Here at my house its around $1.60 thats a big drop.

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boski boski
 
December 15, 2008 09:44 PM
The big factor is less demand, but you have to think about gas on a higher level. You're not really talking about gas, you're talking about oil. Oil is used in many many other ways other than just for gasoline. My brother works for a oil and gas company and is in the rubber plant (where these companies really make a profit). Oil is used in everything from plastic to asphalt to perfumes. All of these items are suffering from losses as well. Retail is down so all items that are derived from oil are taking a hit as well.

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splatham splatham
 
December 15, 2008 09:52 PM
I would say that the massive swing in oil pricing was due to hedge funds and mutual funds bartering up the price of a barrel. They were expecting to see developing nations such as China and India grow leaps and bounds over the next decade. With that they expected them to consume more oil. This caused the drastic increase.

The decline that came along not to far after was caused by the realization that the U.S. was in a recession and that our national financial crisis was no longer national... it was global. Without strong American growth you cannot reasonably foresee developing nations growing much faster either, thus the rapid decline in a barrel of oil.

I personally believe that oil should not be traded on by hedge funds or mutual funds for this simple reason. Because this is such a precious commodity that is used across the globe we cannot afford to have these drastic price swings that can so easily affect the everyday person that doesnt want to invest in oil.

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klaatu klaatu
 
December 15, 2008 11:56 PM
In the early 1970s, the Trilateral Commission relinguished control of oil production to the Arab states on the condition that oil be priced only in dollars. Hence, the price of gasoline rises and falls inversely with the price of the U.S. Dollar. The dollar, in turn, solely reflects relative inflation between foreign currencies (see Enzig, 1973). Since 2007, the dollar has risen sharply due to deflation. Conversely, oil which is priced in dollars, has fallen. Many hedge funds were fooled into thinking the government's increase in monetary aggregates would produce inflation. They failed to realize that the velocity of money (i.e., turnover) was plummeting -- people were hoarding money. To their detriment, the hedge funds initially bought oil believing it would rise with inflation (a fall in the dollar). They dumped oil when it became clear deflation was actually occurring and causing oil to fall ( rise in the dollar). The extent of deflation is revealed by the 0% rate on short-term money and the historic low rate on the 30-year T-Bond. People are hoarding cash.

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williamwac... williamwac...
 
December 16, 2008 12:41 AM
Read the answer from trupright That is the only one that knows what she is talking about. Ignore the rest.

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glennswest glennswest
 
December 16, 2008 03:48 AM
Actually its demand. The gas price exceeded the price elasticity. Also
concurrent and because of the gas price, the US marketplace is now in
recession. People have stopped travelling 1) because of the gas price and
then 2) the downturn. This has reached arround the world, so gas demand in china and india is down. So now the supply is exceeding the demand at the moment.

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