Why economic crisis made oil cost decrease

Demand for oil goes down when all the energy-hungry people and countries start tightening their figurative belts.

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PlentyMag.com

Mon, May 04 2009 at 1:39 PM

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Economics, Oil & Gas

Q. Why exactly, in laymen’s terms, is the economic crisis causing oil prices to go down? – Sarah, NY

A. Don’t you find that it helps to use baked goods to understand complicated concepts? I do. Let’s take cookies: Just the way demand for Girl Scout cookies would go down if the entire population became anorexic/manorexic overnight, demand for oil goes down when all the energy-hungry people and countries start tightening their figurative belts (and maybe literal belts, too). What with this little, um, ‘downturn’ in the markets, people are driving, flying, and going out to dinner less often. They’re buying fewer cars and iPods and sneakers, and they’re starting fewer businesses. The result is a general decrease in activity, and that means less demand for oil. Here’s how Marc Law, assistant professor of economics at the University of Vermont, put it succinctly in an email:

"The financial crisis is causing a global economic slowdown. As a result, the demand for a lot of inputs (including oil) is falling, which has contributed to a decline in oil prices."

We’re worried that it’s not just major corporate players and OPEC that are going to take the blunt of the economic blow, but also smaller, greener, more vulnerable companies in every sector from clothing to cars. Oh, and cleantech—that booming little industry that’s been excitedly inventing plug-in cars, generation 2.0 solar panels, and improved wind turbines.

Roger Lowenstein, in a recent New York Times Magazine article, explored the drop in oil prices and it’s implications for green tech, oil dependence and foreign relations, the environment, and the economy. His suggestion? A gas tax that would kick in if prices fell back down to $70 a barrel. (For reference, prices closed at $64.15 on Friday, according to CNN.)

"The tax would merely serve as a floor — a new lower bound. Auto companies would never have to worry that cheap gas would tempt consumers away from efficient cars; investors could finance development of batteries and fuel cells, because cheap oil could never undercut them. Oil itself would be used more sparingly and last longer. The oil market did its part when it sent the price to almost $150. The government should make sure there is no going back." (Source: Time Magazine)

Amen, Roger.

Story by Tobin Hack. This article originally appeared in Plenty in October 2008.