Why are the gasoline prices 1/2 what they have been for the past year?
My coworker, Phil Keller, gave me this handy formula:
The retail gas pump price changes correlate with the crude oil barrel price as follows-- A $1 per barrel change is reflected in a 2 cents per gallon at the pump.
So the falling gas price from $3.79/gal to $1.50/gal must be represented by a correlation in crude oil prices. In fact, crude oil has been slashed from $110/bbl to $44/bbl.
With increasing global demand for oil and logical decreases in supply, how can the price go down?! Economic theory states that rising demand of a set supply will increase the price (otherwise there will become a supply shortage).
The answer lies in the 'fair market.' OPEC (organization of petroleum exporting countries) is a cooperative (or a cartel) controlling 40% of the world's oil supply. The organization is able to both set the bbl price AND modify the production (supply). OPEC sets the price regardless of the Supply and Demand curves. OPEC met last week and decided to cut barrel prices by half to give global economic relief. It is meant to be a band-aid, its a placebo to give consumers a false sense of confidence.
De-valuing the bbl price of oil will have an interesting affect on global oil companies and shareholders who were counting on profits; in some cases, they will cut back on their production as the profit margin subsides temporarily.
http://www.eia.doe.gov/bookshelf/brochures/gasolinepricesprimer/index.html
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