When the price of oil and gas are high, it seems like the rest of the economy should be booming as well; however, this isn’t always the case. In fact, even though oil and gas prices have been on the rise over the past few years, jobs have continued to dwindle and consumers still face budget issues every day. Here’s why that’s happening and what it means for you in winter as well as spring and summer months to come.
1) What Does It Mean For Me?
The demand of oil goes up in winter months, which means that oil companies want to ship as much as they can. Increased demand means higher prices, which is great news if you’re a producer but not so good if you are an end user. Higher prices mean it costs more to heat your home, fill up your gas tank or take a flight. If you’re an energy producer or a company that relies on crude oil or natural gas to make its products, though, increased prices can have positive financial impacts. So, what does it mean for me? Well, if you’re like most Americans, we don’t exactly think about our dependence on foreign oil very often (or maybe ever). But soaring prices at any time are really bad news—not just for producers but also for retailers and consumers. One of the best ways to avoid being directly affected by price fluctuations is to diversify our supply portfolio. For example, we could switch from heating our homes with natural gas that comes from overseas sources to heating them with renewable fuel produced here at home in the U.S.—like corn or wood pellets; after all, each pound of coal burned here creates two pounds of carbon dioxide compared with 12 pounds when we burn it abroad.
2) How Low Can Oil and Gas Prices Go?
During periods of high demand, oil prices hover around $100 per barrel. But today, demand is much lower because of a variety of factors including slow global economic growth. As a result, prices are plummeting toward $40 per barrel. While low prices hurt producers by cutting into their profit margins, they can benefit consumers by lowering gas prices at home. Last year’s low gas prices were partially credited with spurring consumer spending during Christmas—which brought more money into local economies as people shopped at local retailers rather than online or out-of-state big box stores. When it comes to oil and gas markets, we may see prices plummet in 2015 again—perhaps even as low as $30 per barrel.
3) Why Do Oil and Gas Prices Fluctuate So Much?
While there are many factors at play when it comes to oil and gas prices, one of the biggest influencers is supply and demand. As long as there’s an industry to supply oil and gas, companies will continue to extract it from beneath our feet. But if something happens that decreases supply, like bad weather or technical issues at a refinery, prices go up. The same can be said if there’s something that increases demand—like unusually cold winters in America or a new housing boom. In short: Supply + Demand = Oil Price The more you know about these basic economic principles—along with why they apply specifically to energy—the better you can plan for your future energy costs.