Crashing Financials, Oil Prices and... I Need Gas for my Lawnmower!

So, this morning it seems like the financial world is falling apart at the seams.

Much of the debacle — for a change — isn't centered on COVID-19, but on tumbling oil prices as talks between OPEC and Russia broke down and a price war in the oil industry broke out.

*"Oil independence?"

Many people tend to think of oil as "oil," but oil is part of so many things we do.

Transportation, air travel, plastics...

Meanwhile, at the Pump...

Oil, and oil derivatives — like the gas you put in your car — are strange creatures. Well, strange, at least when it comes to how things are priced.

Have you ever noticed how when there's a 10% rise in the oil price, the price of gas immediately goes up 10% or more? Yet, when there's a 10% decline in the price of oil... nothing really seems to change, or maybe the gas prices slowly trickle down a few cents.

It would be nice to celebrate that because oil prices just went down by 25%, we will soon be buying cheaper gas.

But I have my doubts. Spring is coming, and I need to go fill the 5-gallon cans with gas so I can keep mowing, all summer long.

A spiky topic...

Oil is not a "Product!"

The weird thing about oil — and subsequently gas — is that it's not really a product. It's a commodity.

Eggs are a product. The price you pay for eggs is directly connected to what it costs to raise chickens, collect the eggs, package them and get them to market.

The price you pay for gas (oil) has only a marginal connection to what it costs to drill, extract, refine and send the gas to your local service station. Here in the US of A, it actually costs about $20 to extract a barrel of oil (+/- $5 of which is taxes). It costs that, regardless of whether the price of a barrel of oil is $30 or $70. The price of oil doesn't suddenly fluctuate wildly because all the oil is gone or people suddenly found lots of oil. It's not demand and supply, it's the effect of market psychology and speculation.

And that is a large part of what influences the price we pay at the pump.

So I'm not going to hold my breath in expectation that this will be a "cheap year" to keep the lawn mowed, or to go on camping trips.

It's a strange world we live in!

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Created at 20200309 13:02 PST
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