Empirical Paper Assignment

Econ 313

Empirical Paper Assignment

The State of Current Gas Prices and Consumption

No one anticipated oil prices to drop as significant as they did, and they also did not

expect gas prices to remain as low as they have been. According to the following graph

produced using FRED, gas prices began to drop in dollars per barrel at a steep pace ever since

July 31 of 2014:

The questions people want answers to regarding the decline in gas prices are why have

gas prices dramatically declined and why have they remained at relatively low prices? Well, as

Matt O’Brien stated in his report, the answer lies in the most basic and important concept of

economics: supply and demand. On the supply side, we observe that in recent years the new

shale oil that has come into the oil supplied was not what consumers in the United States

expected it to accomplish, which was push down gas prices. Also, they did not expect the oilcontrolling Saudi Arabians to maintain their level of oil supplied in response. On the demand

side, the demand for oil has and is decreasing because of the decrease in global activity. The

reasons gas prices have remained this low are because shale oil is becoming more efficient to

supply and because oil companies have invested huge quantities of their money into expanding

their oil business in the form of debt. These oil companies cannot stop producing oil because

they will have no income and they have a liability with their creditor.

With gas prices decreasing, we expect consumers to spend their gas savings on other

expenditures. However, we observe that, through FRED, real personal consumption

expenditures have remained at a relatively flat and steady pace.

The two reasons that can assist in the explaination to this phenomenon are that

consumers are using their gas savings to pay off debt and they are going to spend these

savings in the future. We can speculate that many individuals obtained debt because of the

financial...