No sighs of relief, please

In case you were heaving a large sigh of relief over the recent drop in fuel prices, my advice is: don’t count on it. There are clear reductions in the price at the pump, no question about it. There are three main reasons for this. First, the economy world-wide is slumping drastically. If you’re worried about your future income stream—like what happens if you lose your job—then you are likely to cut down on frivolities such as unnecessary car trips. Many people have adopted this attitude. The result? Aggregate demand for fuel drops.

Second, you may also still be reacting to the recent spike in fuel prices (surpassing $4.00 per gallon here) and have reduced car use; have traded your gas guzzler in for something more fuel thrifty like a Prius (in our neighborhood Prii almost outnumber whatever is second in popularity); have finally talked your boss into letting you telecommute at least a few days per week; or all of the above. The result? Aggregate demand for fuel drops even more.

Third, according to the November 28th Financial Times, in an article titled “Dark art of assessing oil production cuts“, the major oil producers may be cheating on their decision to reduce production iin order to keep fuel prices high. Part of the problem is that apparently nobody knows exactly how much oil the various members of OPEC are producing but the general suspicion is that its more than they are admitting to. The result? The supply of oil is not decreasing very much.

So aggregate demand for oil is diminishing but the supply of oil isn’t, at least not enough to support those high prices. OPEC’s (and the US auto industry’s) hopes are that you will once again be gulled into shedding your hybrid in favor of an Urban Assault Vehicle. Are you ready for that? Here’s why you shouldn’t be.

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