The ups and downs of cheap gas
By John Toth / Editor and Publisher
When I filled up with gas at my neighborhood convenience store right down the block, I noticed that the price was higher than at the big chain stations.
“I’m here to buy your expensive gas,” I joked.
The owner runs the store, and we often chat a little when I go in there. She bought the gas months ago wholesale at $2.67 a gallon.
To save the shipping charge, the store had to buy 10,000 gallons at a time. So, do that math. It had to be paid for at the time of purchase. No monthly terms are given to these small operations. The gas lasts a long time, because the store does not do as much volume as the big stations.
But late last year, the bottom started dropping out of the oil prices. OPEC kept the world supplies high, even though the price per barrel was dropping. When supplies are high, OPEC usually cuts production to drive prices back up.
This time, though, OPEC wanted a bigger share of the global market, and didn’t mind taking a hit. We have been increasing production here at home through fracking, and a lot of independent companies have been making a good profit.
But if the price per barrel goes down to the point where fracking becomes too expensive, and those operations fold, OPEC grabs a larger chunk of the global market. Lose a little now, gain a lot later. Not a bad plan.
Let’s throw Russia in the mix
Russia’s economy depends to a large extent on oil and gas exports to Western Europe. But Russia attacked Ukraine in 2014, and continues to occupy the country’s Eastern cities, including Crimea. The West imposed sanctions that started devaluing the Ruble, the Russian currency.
The sanctions were working well enough when OPEC decided to make its move to corner the world’s oil market. As the price per barrel dropped again, Russia’s cash on hand dwindled, and the Ruble plunged even lower.
As more sanctions took effect, and Russians started dumping their Rubles for Euros and Dollars, the Ruble was on the skids, and Russia’s economy took some big hits.
Suspicious minds would venture to guess that since OPEC was going to do this anyway, the USA had a hand in the timing to give Russia a double whammy. That’s the price of invading a weaker neighbor and strong-arming its people.
There are unintended victims on both sides, but the odds are that we can hold out longer and take a lesser hit than the Russian economy.
Some domestic oil producers will shut down. If enough do, OPEC will have its wish. But while this experiment is taking place, there is one more effect that is actually good for the American economy.
Here is how good we have it now. In 1969, the price of gas was 35 cents per gallon. That was cheap. That’s why I didn’t care that my 1968 Buick Skylark only got 9 MPG. But $2 today, which is about what a gallon of gas costs now, was worth 30 cents in 1969, according to the inflationary index.
Our pay is not what it was in 1969. We are getting a heck of a deal right now, while the West is trying to school Russia and OPEC is trying to grab a bigger share of the world market.
Not putting all that money in the fuel tank has allowed shoppers to have a great Christmas, and helped the economy boom in the 4th quarter.
But my friend, the convenience store owner, is now selling gas she bought wholesale at $2.67, for $1.98. She lowered the price to what the chains charge and is taking a big hit. She and owners of other independent stores like hers, are the unintended victims.
The sooner she can clear the gas out of her tanks, the sooner she can get another shipment, perhaps at a nice low rate. Maybe by that time the market will start creeping up, and she’ll make up some of her losses.
Meanwhile, I’m filling up there as much as I can to help her. I hope these stores make it, and continue to be part of our community. But it doesn’t look good right now.