Enjoy It While You Can

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Cheaper gasoline may be here for a while.

On the face of it, OPEC’s decision to take 1.2 million barrels per day offline would seem like bad news for Americans enjoying today’s less exorbitant gas prices. Less supply equals higher prices. Right?

Well the economics are neither as simple or intuitive as that. I interviewed oil economist Jim Williams of WTRG Economics and he made the case that by adding spare crude back into an oil market that’s been stretched to nearly maximum capacity, OPEC’s move may actually help lower gas prices.

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Add spare capacity to the system as OPEC is doing, and yes supply goes down, but so does the security premium. “With this much spare capacity,” says Williams, “Nigeria can blow up and we can cover it. A big chunk of the risk premium goes away” — and crude prices may start to settle back toward a figure governed by market fundamentals rather than jitters.

If this keeps up, says Williams, we may all be enjoying sub $2-a-gallon gas by next summer.

That’s good economic news, I guess. It seems to me it also just pushes the inevitable down the road a bit. It also discourages conservation necessary to slow global warming. But you should have more money in your pocket after filling up. Enjoy it while you can but don’t lose site of the long-term problems.