After many years of rising fuel costs many of us are puzzled at the recent and significant drop in both Gasoline and Diesel Fuel prices over the last 5 months and wonder what’s in store for 2015. This article explores what’s driving this and gives an outlook for 2015.
The Simple Answer
The simple answer to why the price of fuel is dropping is because the underlying cost of crude oil is dropping. Crude oil was over $100/barrel back in July and has now dropped to $68 per barrel, that’s an over 30% drop in just 5 months. What’s going on here?
Demand vs. Supply
Production is outpacing demand for fuel and inventories are growing. That means lower prices. Plus, there is a bit of a game going on right now between OPEC countries and North American Producers. In the old oil cartel days, OPEC would agree to increase or decrease production and everyone would follow suit. Currently, if OPEC decided to cut production, there is no guarantee that North American producers would follow suit and OPEC would lose market share. So, you can see there is a bit of a game of chicken going on. This is what has led to such a prolonged and dramatic fall in oil prices.
Why is diesel not dropping as fast as gasoline?
Many people in the trucking industry are looking for relief from the years of high diesel prices. While diesel prices have fallen, the fall is not as dramatic as gasoline. Some are wondering why. Well, there are a few factors at work here.
Winter Gas and Seasonal Fluctuations
Gasoline generally gets less expensive in the winter because the formulation changes. In the summer, expensive chemical additives are needed to stabilize the gas at higher temperatures. In the winter this is not necessary, leading to lower gas prices in the winter. Diesel on the other hand has an opposite influence. Diesel supply and demand is tied to heating oil. Because of the increased demand for heating oil in the winter, diesel tends to be more expensive in the winter months.
General Demand and Supply
Since 2010 the demand for gasoline has fallen 1.5%, this mainly due to more efficient car engines. However, over the same period, diesel demand has increased by 6%. This is mainly due to increased use in power plants, trucking and farm equipment.
Why is fuel not falling as fast in Canada as the US?
As compared to the US, the price of fuel in Canada is not falling as fast. Why is this the case? Well, crude oil is priced in USD. Also, a huge part of Canada’s economy is selling oil for export. So when demand goes down and the price of oil drops in USD, the Canadian dollar falls. This makes it more expensive to purchase USD for oil. In a sense, it negates some of the drop in the price of oil.
Forecast for 2015
The future is always a difficult thing to predict. However, for the short term, forbidding any geo-political crisis, it looks like we’re in for a year of relatively cheaper fuel prices. Plus, many oil producing nations like Russia and Venezuela, for example; are highly dependent upon oil revenues to fund their governments. They can’t afford to cut production when the price of oil is low. They have to produce more! Forcing prices even lower. Let’s hope for some great savings at the pump this year.