November 12, 2008

Why Oil Prices Dropped Recently

Rasheed Moore asked over at Tariq Nelson's blog, "How do oil prices just suddenly drop a dollar a gallon when our economic crisis hits?"

Because everyone stopped driving.

Not really, of course, but the trends against driving have gained the upper hand in recent months, which has caused the demand for oil (and gasoline) to drop. Several suggested readings:
  • James Hamilton at Econbrowser does a monthly post showing US auto sales. The most recent post (for October sales) shows that US-manufactured car sales are down 27% from a year ago, US-manufactured light truck sales (including SUVs) are down 40%. GM's chief sales analyst: "Clearly we're in a dire situation."
  • The Federal Highway Administration's (FHA) Travel Trends (August 2008 - most recent month available) - In the 12-month moving average, 2008 has the fewest amount of vehicle miles driven since 2003. The peak year was 2007. Most people aren't driving as much as they used to.

    In my original response, I linked to an FHA graph showing the 12-month moving average since 1983 to make clear the drop in the number of vehicle miles traveled within the US. The original FHA graph is rather difficult to read, so I've made a new graph, below, showing the same data:

    If it makes you feel any better, The Economist is reporting that oil prices may be going back up to around $150 or so by 2010.
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