With crude oil prices hitting a record low last year, some Americans went all out to celebrate liberation from $4 gallons. Deciding to bypass the fuel-efficient Prius, many of us bought instead gas-guzzling SUVs, like the Hummer, deciding in a characteristically American way that good times were here to stay, but are they? The upshot of buying of cars with poor fuel economy is indicative of general confusion by consumers regarding the economics of the oil market as a whole.
An astounding lack of understanding of market shifts is communicated by the increase in SUV sales, but this is to be expected. Like most other things having to do with the Middle East, Americans deem it “too complicated” and make little attempt to comprehend what is actually going on. So let me explain.
The market for oil is complicated, that’s for sure; however, we are well aware of what is driving prices down: Saudi Arabian suppliers are flooding the market with oil, causing the world supply of oil to increase. By law of basic ECON101 supply and demand, when the supply of a good increases, the prices decreases. When there is a price decrease, quantity demanded increases. The lower prices cause consumers to buy more oil and complementary goods to accompany that oil, like cars that get less miles per gallon. See? Simple.
Far from the good graces of Saudi producers, the increase in oil supply from the country is a move to take down smaller oil producing companies, like those found in the United States. Small US oil companies, called “strippers,” contribute a sizable minority of oil to the market. In the wake of plunging crude prices though, these smaller companies are being forced to close because they cannot stay competitive. American suppliers in burgeoning fields, like the shale oil producers, are stopped in their tracks because they cannot sustain the losses of cheaper crude prices. Lower crude prices mean lower revenue, and thus an increase in relative cost to suppliers who must sustain heavy losses to remain in business. Smaller operations, once lucrative for owners and employees, have become minefields of layoffs, debt, and closed wells.
Saudi Arabia is the largest oil producer in the world. In flooding the market, they are losing money, but they can afford to sustain the massive losses in the short term. Let me ask, can we afford it? The price cut is decimating the domestic oil industry, and I don’t think I can survive a resurgence of the Hummer.
Saudi Arabia, I know you want to hurt American oil producers, and mission achieved; however, your actions have caused a renaissance of SUV buying, and that is reprehensible, even by your standards. I know that these lower prices won't last forever, but the sooner you go back to your normal ways, the better. So please, make it stop. I cannot take the exhaust fumes anymore.
