Crude Economics
Drivers Winning Big on Oil Price Plunge

It’s a bad time to be in the business of selling oil, with prices at seven-year lows threatening the solvency of private firms and the national budgets of petrostates. But for buyers, it’s a very different story. Cheap oil has far-reaching economic benefits (outside of the oil industry, of course), but is perhaps most visible to consumers in the form of cheap gasoline. Here in the United States, regular grade gas is more than 70 cents cheaper than it was at this time last year, and more than $1.60 cheaper than it was back in June of 2014, when oil prices were above $100 per barrel. And as Reuters reports, European drivers are now enjoying the benefits of the crude price plunge, as well:

According to the RAC Foundation, the price declines would cut the cost of filling up a 55-litre car [in Britain] with petrol by around 9 pounds compared with last year, while diesel would be more than 11 pounds cheaper. […]

The average diesel price at the pump across Europe has also fallen by just under 1.5 percent from late November to this week to an average of 1.16 euro per liter, according to European Commission data, more than double the rate of gasoline’s decline.

But as much of an economic boon as low gas prices are, they don’t do any favors for the environment. The New York Times explains:

The economics is simple. Low gas prices encourage people to drive more, and to buy more gas-hungry vehicles […]

Recent data on new-vehicle purchases is revealing. Fuel economy for new cars, light trucks and sport utility vehicles rose fairly steadily from 20.1 miles per gallon in October 2007 to 25.8 m.p.g. in August 2014, said Michael Sivak, research professor at the University of Michigan Transportation Research Institute. Since then, based on Environmental Protection Agency ratings, fuel economy of the new-car fleet has reversed course, dropping to 25 m.p.g. in November, a decline of 0.8 m.p.g.

“That is a huge decline,” Professor Sivak said. It reflects a marginal shift in current buying preferences, away from smaller, efficient cars and toward bigger light trucks and S.U.V.s.

We were seeing signs of a surge in SUV sales as far back as January, and it seems the trend has continued throughout this year. Greens will bemoan this development (the NYT piece quoted above being a prime example), but it serves as an important reminder that, all things being equal, people won’t en masse choose the cleaner, greener option unless they have an economic incentive to do so. Back when gas prices were higher, sales of high-mileage vehicles surged because consumers were reacting to being gouged at the pump, not because of some deeper appreciation for the eco-effects of their driving. That’s why we’re seeing less efficient vehicle sales surge anew. There’s a lesson here for policymakers: If you want your green dream to become a reality, couch it in tangible economic realities.

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