You’re going to get groceries, either in your car or in the passenger seat of your friend’s car. You notice the car’s gas tank is on empty, and either you or your friend drives the vehicle into a gas station. You expect to spend around $4 a gallon. However, to your elation, you realize that gas prices are incredibly low. It’s probably around $2 per gallon.
With the recent dip in gas prices, I’m sure that many of you have either experienced or seen someone else’s excitement over low gas prices. It’s great to save a nice chunk of money without sacrificing consumption.
But it’s interesting to see how your saving at the pump is influencing the entire world.
The reason for your savings is actually quite an extensive tale. A few months ago, production of oil in the United States rose dramatically as a controversial rock-splitting process known as fracking exposed significant oil deposits in North Dakota and Texas.
With the United States adding extra supply of oil into the international market, basic supply and demand models inform us that the increased supply spurs a decrease in price. This implies that for prices to remain the same, international countries must decrease oil output.
This simply wasn’t going to happen.
The Organization of Petroleum Exporting Countries — OPEC for short — is an organization that works with the world’s largest oil-exporting countries (besides Russia) to regulate the market for oil. The organization met for a regular meeting on Nov. 27 to discuss whether to produce less oil, which they decided against. Since these countries are economically dependent on the oil market, losing a piece of the market pie to America would be detrimental to the countries’ long-term financial stability — even if they must endure lost revenue from lower prices in the short run.
So, major oil producers like Saudi Arabia — the country in OPEC that supplies the most oil — are taking the hit. They’re willing to let oil drop to $20 per barrel compared to the $110 per barrel prices over the summer.
And while OPEC is indifferent to these reduced prices, Russia, the largest exporter of oil, is terrified.
The ex-finance minister of Russia is quoted as saying, “We are entering a full-fledged economic crisis.” Being the largest exporter of oil in the world, the country is on the brink of a two-year recession. Russia spiked interest rates to the highest rate in 16 years to stabilize their economy, and inflation is predicted to be 12 to 15 percent. This all results in a predicted economic output contraction of 7.9 percent. Not good for the former Soviet Union.
I’m sure you’re reading this and asking why this international economics influences college students. Perhaps I’m being a tad of a nerd, but isn’t it at least slightly fascinating that your economic saving has such a wide impact? That it’s the topic of conversation in OPEC meetings involving 12 countries?
Plus, decreased oil prices could lead to decreased costs for plane travel and express delivery companies, which could translate to cheaper expenses for you flying home or ordering textbooks via FedEx.
These prices also influence your spending in areas outside of traveling. If you’ve saved money, you’re likely spending it elsewhere. More consumption equals a boost in production, labor and company revenues benefitting from heightened purchases. Your Espresso Royale owners, Uber drivers and producers of Crystal Palace are probably feeling these effects.
Additionally, even though your consumption contributes to the negative economic echoes in Russia and Saudi Arabia, you may also be their savior.
While a decrease in international supply could take prices back to normal, so could an increased demand.
Saudi Arabia believes this too, as stated by their oil minister, Ali Al-Naimi. The intuition behind this is that the dip in gas prices will incentivize drivers to drive more. This increased demand for gas would eventually compensate the oversupply of oil in the economy. Therefore, your purchase of more gas could increase prices, reviving the Russian economy.
So, two weeks from now, when you and your friends are planning that spring break trip to Florida or Cancun, the thought will cross your head that you have to tell your parents. Maybe they’ll be fine with it, but if they’re not, you have an out. If they raise concerns about the boozing and risks associated with partying in the sunshine, fire back at them that this trip has nothing to do with Spring Break. Rather, your road trip or flight is a calculated attempt at consuming gas to create an equilibrium in the international economy. You’re trying to stimulate Saudi Arabia’s economy; you’re trying to be the Mother Teresa to the entirety of Russia. Advising against this trip is simply a disservice to the goodwill of the world.
Okay, maybe that won’t work, but if it does, you’ll be thanking me for this column.
Michael Schramm can be reached at email@example.com.