3 Reasons Why Oil Prices Have Collapsed

The oil industry has done a great job of self-promoting their increased production capacity as the reason for the collapse in oil and gasoline prices. Let’s get the facts right: The world has been, and continues to be, awash with oil supply. The world has been producing 90+ million barrels of oil per day for several years.

The reason oil cost $100 per barrel and gas prices sat above $4 per gallon was because of soaring global oil demand that was sucking up the world's oil production. What has changed in terms of collapsing gasoline prices is that the global demand for oil is falling. The three factors driving oil prices down are:

1. Americans are driving more fuel-efficient vehicles


2. The millennial generation is living a digital rather than fossil fuel-based lifestyle


3. China’s economic growth slow-down has cut oil demand

It is this combination of reasons tied to reduced oil demand -- not increased oil supply -- that has collapsed oil prices and reduced your pump-price pain.

Vehicle fuel efficiency up 25 percent

The U.S. is on pace to buy 17 million new vehicles this year. These new vehicles have an average fuel efficiency that is 25 percent better than the vehicles we were purchasing right before the Great Recession. Because we are driving more efficient vehicles, we are also achieving 22 percent lower vehicle emissions compared to the vehicles we purchased just seven years. Most importantly: In terms of your pump prices, these new fuel-efficient vehicles are a major reason the U.S. has reduced its gasoline consumption by 6 percent compared to 2007. The net result is that competing oil companies have to cut gasoline prices or lose market share in response to lower demand.

Millennial generation chooses digital over gasoline

Much of the millennial generation is choosing an alternative life and work style than rush-hour commuting in gasoline-fueled vehicles. They are doing so for two reasons. The first is that they are still trying to financially grow past starting their careers during the Great Recession while also being saddled with school debt. Buying a vehicle does not fit into their budgets. Buying a gas-guzzler is a real budget killer.

The second reason the millennial generation is not buying gas-guzzling vehicles to use in a rush-hour commute is that this is just not “cool.” This is the generation that defines itself by being cool with a purpose. They seek a lifestyle that is affordable, socially engaged and environmentally responsible.

For the millennial generation, the burning of gasoline -- with its link to climate change -- is not cool. Using digital technology to work from home is cool. So is choosing to live closer to work to reduce commuting costs and emissions. What is cool with a purpose is walking, biking or using public transit. The net result is that the millennial generation is dramatically reducing their purchase of gasoline and gasoline vehicles compared to their parent’s boomer generation.

China’s slower growth cuts oil demand

China’s super-hot economic growth is cooling. Part of this slower growth is a normal economic maturation. China has created the world’s largest economic middle class in little over two decades. Double-digit incremental annual economic growth for another two decades is not sustainable.

However, another reason for the country’s slower economic growth is that China now confronts an environmental crisis: Sixty percent of its water supply is contaminated and is unfit for human consumption. Air pollution is a major health crisis where less than 1 percent of China’s 500 largest cities meet the World Health Organization’s air quality standards. The human health cost-consequences of China’s massive fossil fuel consumption are soaring health care costs and reduced worker productivity. In response, China is enacting new public policy to reduce its consumption of fossil fuels, including oil. China’s new approach is a significant price-eroding pressure on the global oil supply.

Technology crossroads: What if oil prices did not matter?

America is at a gasoline price crossroads. We are loving the lower pump prices. It is national news that Oklahoma became the first state to sell gasoline for less than $2 per gallon. The discouraging vehicle sales news is that with lower pump prices we are buying more full-size trucks and SUVs. The return of $3 and $4 per gallon will be the economic consequences if America goes back to buying gas-guzzlers.

California’s consumers are testing another path. California homeowners are buying rooftop solar at record levels to slash their power bills by 40 percent or more. What many of these homeowners are learning is that they can also eliminate their gasoline costs by using rooftop solar power. Many of California’s rooftop solar owners are leasing electric cars fueled from their roofs. They are finding that what they save in gasoline costs from using solar power more than pays for the lease payments on their electric cars. The emerging economics of homeowner solar in California looks like this:

• Zero cash down + guaranteed lower electricity bills


• Savings on gasoline costs > the lease of an electric vehicle

A clean technology crossroads is opening up for America. It can enjoy today's lower pump prices by buying full-size trucks and SUVs that will increase the demand for gasoline and drive up pump prices to $3 and $4 per gallon. Or America can invest in rooftop solar and electric cars so that oil prices and the price at the pump no longer matter.

Image credit: Flickr/philipsphotos

Bill Roth is an economist and the Founder of Earth 2017. He coaches business owners and leaders on proven best practices in pricing, marketing and operations that make money and create a positive difference. His book, The Secret Green Sauce, profiles business case studies of pioneering best practices that are proven to win customers and grow product revenues. Follow him on Twitter: @earth2017