Why Did Oil Prices Suddenly Tank? An Explainer.


Not so long ago, gas was $4 a gallon and everybody was grouchy. Now, oil prices are so low, the cost of a gallon of gas has dropped by more than a third, on average, and as of this writing, it’s at $2.13 a gallon. So how did we get from $4 a gallon in the early summer to it being cheaper than a bottle of soda at the pump?

When did all this start?

Gas prices began to slide in August and really started heading south as it got colder and people went back to school and work. This is actually a fairly typical cycle; even 2013 saw a decline in the fall before sprinting up in the winter. What’s odd is that the slump has kept going.

What happened?

Basic economics, really. Thanks largely to the US shale oil fields, there’s a lot of oil on the market. As we all know, when supply outstrips demand, the price of that supply begins to drop. Normally, when this happens, of course, the producers start restricting supply.

Nobody’s pulled that trigger. Partially this is because some countries literally cannot do that: Venezuela’s economy is so bad, there’s a serious shortage of toilet paper that’s gone on for more than a year, and Iran only just managed to corral runaway inflation and unemployment. Any cuts to production now might quite literally trigger a civil war in some parts of the world.

Not helping matters is the fact that nobody wants to give up market share. US producers would rather eat low prices now in the hopes that they’ll rise in the future, and Saudi Arabian representatives have flat-out admitted they won’t cut production because nobody else will.

Will oil prices stay this low?

Good question. Gasoline is one of the key drivers of oil prices, and by necessity, fuel economy standards are rising ever higher in America, and even China is pushing higher standards. Both hybrids and diesel engines are growing in popularity, and it’s worth noting a diesel engine doesn’t need petroleum products in the first place. Electric cars are still pretty obscure on the market, but they’re gaining in popularity rather quickly.

That said, there are a lot of engines that need gasoline to run out there, and fuel prices tend to be cyclical. So we wouldn’t count on the cheap gas forever: Get in those gasoline fights while you can.