Okay, so don’t actually drink oil, or gasoline for that matter. That’s a bad idea and we both know it. But what you might not already know is why oil prices are so incredibly cheap! The national average for a gallon of gas right now is $2 per gallon, according to the Automobile Association of America. A gallon of water is $2.02 per gallon, plus shipping if you tried to order it online from a site like Global Industrial.
So what gives? Why is gasoline literally cheaper than water right now?
The Oil Boom…and Bust
$90 for a drum of oil was standard fare as recently as last year. Today though, the price for a drum of oil is down to near record lows at just $38 a barrel. It’s like we all jumped in a time machine and went back to the gas pumps in 2008.
As oil prices skyrocketed in recent years, company after company in the oil drilling and exploration sector fought to expand and take advantage of the high margin industry. Fracking became more and more common in the US. In fact, oil production in the US reached levels that have caused many importers of oil into the United States out in the cold (Nicaragua, Saudi Arabia, etc.).
As of today, oil exploration has seen a sharp decline and nearly 2/3 oil rigs are sitting idle. This has led to more than 200,000 jobs in the US oil industry to be axed. So, while it’s not good news for the oil industry, it’s great news for your wallet! The only thing now though is companies can decrease the amount of oil being produced in order to make the resource much more scarce, therefore raising the price of oil again.
Some Oil Companies Slash Production and Wait…
But that process isn’t an overnight win. It takes time for excess supplies in the market to be dwindled. It’s also a matter of demand falling. Countries in the EU have tough economic outlooks right now, which means less consumers in Europe are driving long distances. What’s more, as vehicles become ever more efficient (thanks Tesla!) and use less to no gasoline to transport us, the perfect storm has really hit the oil industry.
After all, if you’re going to raise the price of something by slashing production, it’s going to take longer for the effects of that to be seen if consumers are using less and less of your commodity every day. And if you have competitors that are willing to take it on the nose and keep pumping out oil, you might be put out of the market. Some have argued that OPEC is using this strategy to try and wean off the competition.