Charlie Hall's Off The Charts

Dr. Charlie Hall

Prices for West Texas Intermediate crude oil—often used as a benchmark of U.S. prices—dropped below $70 per barrel for the first time since 2010. This continues a dramatic price slump for oil, which cost over $100 per barrel as recently as last June. The shift has markedly reduced average U.S. gasoline prices (which are now well below $3 per gallon) and has put a little more money in consumers’ wallets. But what’s driving this slump? There’s one short-term reason and three longer-term reasons.

The most immediate reason is that the OPEC (Organization of Petroleum Exporting Countries)— a group of 12 nations, including Saudi Arabia, Iran and Venezuela that holds enormous power over global energy market and produces 40% of global oil supply—decided recently not to cut production at their meeting in Vienna. The meeting was the most important in years because it came amid a pre-existing slump in prices. Everybody wanted to know if OPEC would take any action to halt the decline. It didn’t—presumably because its members decided it was wiser to weather the current storm—and crude oil prices immediately tanked. The longer-term reasons include booming U.S. and world oil production, little demand in Europe and Japan, and improving automobile fuel efficiency standards.

Even though this trend has fostered much attention in the media, with many forecasting positive effects on consumption, it’s important to remember that gasoline represents a small part of household budgets. The typical American household buys about 1,200 gallons annually, so if prices continue to stay at their current levels, that adds up to a yearly savings per household of at least $400. Ironically, that’s about the yearly expenditure on lawn and garden products by the upper quartile of our consumers. GT

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Dr. Charlie Hall is Ellison Chair in International Floriculture for Texas A&M University in College Station, Texas. He has also recently been appointed AmericanHort’s chief economist to “provide vision, leadership, analysis and technical competence.” Dr. Hall can be reached at chall@tamu.edu.