What do declining oil prices mean for alternative fueled vehicles, plug-in hybrids and EVs? If anything is to be learned from the past periods where gasoline prices have dropped precipitously it is that they spell death for alternative fuels. Dropping oil prices are a very bad thing for all alternative fuels and most likely will be a very bad thing for electric vehicles and plug-ins as well.
From 1981 to 1986 reduced demand and overproduction created a large amount of oil not being consumed in the open market. I remember going to an area that had refineries at the time and seeing a large number of oil tankers just sitting, anchored out on the bay waiting for their turn to hook up to the refineries. The refineries were not operating at full capacity and when they shipped out their inventory as product, then and only then would they allow for the oil tankers to hook up. This five-year-long period has a direct correlation to the improved fuel economy that vehicles were required to achieve by the CAFE (Corporate Average Fuel Economy) standard laws passed in the 1970s. These laws took effect during the later part of the 1970s and the first part of the 1980s. Fuel economy for automobiles reached somewhere around 27 miles per gallon on average in 1986. Even though these laws may have been put in place during that period of time, it was consumers that rapidly embraced smaller more fuel efficient cars coming from Japan. It was a natural reaction after rising gasoline prices hit them hard in the pocket book and spurred deep recessions in the 1970s. It was a reaction that the US automobile manufacturers were slow to embrace.
Consumers also embraced alternative fuels. Even though the sales of such vehicles were small in number, electric cars made the scene with Bob Beaumont’s Sebring Vanguard Citicars and other brands in the mid 1970s. Although electric vehicles had some impact for alternative fuels it was ethanol that was the biggest entry for alternative fuels, typically blended with gasoline. Demand and pricing was such that independent stations selling ethanol blended gasoline sprang up to sell the stuff starting in the corn belt of the Midwest. By the end of the 1970s major oil companies jumped in the game. Despite being heavily subsidized the number of biomass ethanol producers dropped 47% by 1985. Gasohol as a readily used term to describe 10% ethanol blended gasoline disappeared from America’s vocabulary, and the gasohol independent stations disappeared from the gas station landscape.
I remember a Freedom Gasohol station on route 1 south of Alexandria, Virginia that stood abandoned for over a decade. It stood there as a reminder to me of how fortunes can change very rapidly for investors in alternative fuels. It was also a reminder to me that history is an important teacher. Those who don’t know history are likely to make the same mistakes as others have in the past. The United States by allowing for oil and gasoline prices to drop again without a price floor is reliving a past where alternative fuels were pushed from public awareness.
What is causing the prices to drop today is largely an over supply similar to that of the 1980s. Probably also caused by an anticipated dramatic increase in the CAFE gas mileage requirements signed into law in 2009, but that is not all. John Maynard Keynes referred to a phenomena that tended to keep prices high even though demand drops as “the sticky nature of prices.” Let me explain it to you in a more understandable way. Let’s say you have a house that you borrowed $90,000 for and put $10,000 as a down payment. Let’s say later you want to move from the area and want to sell your house. However, in the in-between time prices of houses comparable to yours have dropped to $70,000. Let’s say you still owe the bank $85,000 and you want to get back the cash you put into the home. You are going to be reluctant to drop the price to $70,000. You most likely will list your home at $95,000, where you will at least get back your down payment. However, the market demands a lower price. Once you get over the shock and accept the reality of the new price being $70,000 you will still have to deal with the bank. The bank is going to not accept a sale that is below what you owe them. So the price again can’t go below the $85,000. When the bank finally comes to grip with the reality of the market and accepts market pricing they will still want to have a say in what they will accept in terms of an offer. Basically, people and businesses get used to prices being a certain amount and have locked in their expenses and expected profits at that price. It is hard for them to move off of that expected price. When prices drop fast like they have with oil and gasoline lately, there are other factors at play. There has to be a willingness by the oil companies to sell at lower prices. The question is what are those other factors for the oil producers that have them willing to sell oil for far less money? Demand has lowered by 13%, so why are we seeing a 50% or more drop in oil prices and why are oil producers willing to accept that asking price when demand exists above that 50% drop in price?
There are odd other factors in the oil markets that make them not react to typical economic conditions, however, surplus crude oil is going to have a strong downward pressure on prices, and when coupled with other factors we get the big price drop. Wall street analysts point out that the price move by OPEC and in particular Saudi Arabia has to do with them believing that the cost factors in US fracking shale oil are high and that by dropping the price of oil OPEC might be able to stop US production since at a certain price per barrel of oil US shale oil becomes unprofitable. Saudi Arabia hopes that by maintaining market share they will be able to increase prices at some later date after the shale oil producers leave the market. Analysts point out that this is flawed thinking, because as soon as prices rise again to where shale oil becomes profitable these producers will comeback online to produce oil again. Since this idea is easily viewable as flawed this may not be the reason for dropping oil prices. I just don’t think the Saudis are stupid.
Other analysts think that the price drop might be a coordinated political move by Europe, Saudi Arabia and the United States to have an affect on global politics. They say that Europe has a desire to weaken Vladimir Putin’s meddling in the Ukraine, Saudi Arabia wants to keep Iran from attaining nuclear weapons and destabilizing the region, and the United State wants to keep Venezuela from influencing Cuba. The high price of oil funds all of Russia, Iran and Venezuela’s extracurricular activities. For the US, Europe and Saudi Arabia a drop in oil prices keeps Russia, Iran and Venezuela in check. If it were true, it seems to be working. Russia’s economy is on the verge of collapse, which, we would hope would curb Putin’s meddling in Ukraine. Iran seems to be coming around to the idea of negotiating a nuclear deal with the west, without oil propping them up they may be more willing to negotiate their nuclear ambitions away for a removal of the sanctions restricting their sale of oil. Venezuela has stopped subsidizing oil to Cuba and, despite other reasons given, many experts say that that is the main reason behind Cuba’s push for better relations with the US. I have already seen an article about US oil companies working with Cuba to do oil exploration there. However, this seems far fetched to me and rather complicated given the entities past cooperation. Also, the United States government and in particular this administration have very little influence on oil companies that are humongous international entities. Although Saudi Arabia might be able to control its oil output, Europe and the United States most likely would not be able to do much in this alliance to influence the price of oil. Which leads me to think that it is probably something else entirely that is leading to the willingness to accept a much lower price for oil.
It could be that oil companies maybe trying to reconstruct demand that was destroyed because of high oil prices and the deep recession it triggered. Oil companies and oil producing nations are hoping that consumers will abandon their thrift ways and go back to overusing petroleum in the form of big cars and trucks, or they may be hoping that consumers will not keep fleeing petrol powered vehicles for alternatively powered ones. This is, I believe, a very important possibility.
What is the one thing that can change the oil demand landscape where it would become irretrievable if it were to actually take hold? Alternatives. For example, we are multi-food consumers. If the price of a single food goes dramatically upward, we simply don’t purchase that food and choose an alternative food to eat. Therefore one source of food can’t jack up its prices and remain in the market for long. In real world economics prices always settle at an equilibrium between price and supply, and the price of whatever can be substituted for that item. The ability for consumers to choose a comparably priced alternative keeps the price of any item in the food market in check. Electricity in most of the United States is far cheaper than gasoline and therefor electric cars provide a competitive alternative to gasoline powered vehicles. This has proven to be a threat to the monopoly like hold that oil has had over the market of car fuels. When electric cars were just a novelty, oil producing nations and oil companies were unconcerned with electric cars and other alternatives and therefor jacked up prices. However, electric cars have sold well over a quarter of a million vehicles last year. That constitutes a real threat that oil sales can’t recover from.
My feeling is that oil companies and oil producing nations don’t want their gravy train to end and they are taking a momentary hit on extreme profits to kill alternatives. That is why I believe there is so much willingness to accept such a precipitous drop in the price of oil of 50% or more for a mere 13% drop in demand.
Source: EV World Blog
