The Law of Supply and Demand Finally Catches Up to Oil

It had to happen soon or later. The Law of Supply and Demand has finally caught up to the oil market. The price for a barrel of oil has plunged recently from over $147 to under $120. One of the major reasons for the decline is that consumers are changing their behavior. Irwin Kellner notes:

In March, the yearly decline was a bit over 3%. That was the biggest drop in miles driven since 1942. May’s drop of nearly 4% over last year was the most ever, according to the Transportation Department
While significant, this drop in miles driven is only the beginning of what appears to be a prolonged reduction in gasoline consumption. Wait until the mix of vehicles on the road changes.
As you know, people are now shunning SUVs and pickup trucks in favor of small cars. The object, of course, is to improve fuel efficiency.
As these gas-guzzling behemoths are replaced by small cars, the average vehicle on the road will get better gas mileage, thus further reducing gasoline use even if miles driven levels off.
To this add a likely increase in the number of vehicles on the road that are hybrids, pure battery powered, use natural gas, hydrogen or solar power and you can see the potential for an even larger drop in gasoline consumption.
As for lifestyle changes, fewer people are traveling large distances on their vacations.
Restaurants report less dining out. And while it’s not so easy to sell one’s house these days to move closer to one’s job, many are opting to work at home, while others are taking mass transit to work, bicycling, or even walking.

Posted by on August 5th, 2008 at 10:42 am


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