Oil economics

Oil has been in the news recently, but in a good way: Oil prices have been dropping and taking gasoline and other fuel prices with them. This is dramatically different than even just a few years ago, when oil and gas prices were rising. What has happened to bring oil prices down? And will it continue? N.C. State University economist Mike Walden responds.

“Well, this is a continuing good news story, because obviously if oil is cheaper, gasoline is cheaper, and that means more money in people’s pockets to spend on other things.   This is one of the reasons why many of the groups that forecast Christmas sales are boosting those forecasts.

“But, to answer the question about why – again, it is always supply and demand: On the supply side, of course, the big news here in the U.S. is that we had a big surge in oil production over the last couple of years. We are now – the U.S. is now – the largest producer of oil in the world. We set that this year.

“At the same time, consumers around the world are using more energy, but they are not using it at a rate that’s growing as fast as or faster than oil production. So translated, supply is going up faster than demand.

“So now, for the future I think there will be some pull back, because at lower prices of oil, what that means is that some producers of oil will find it not productive or profitable to do that. So I think at some point we’re going to start to see supply increases slow. And that will probably mean a stop to the fall of oil and gas prices. Perhaps a little bit of a rebound.

“But still, most forecasters are now saying that a return to the days of $4 or more for gas per gallon is probably over and that we are probably looking at long-run prices around the $3 or $3.30 a gallon range.”

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