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Oil Prices Keep Falling and Falling. What Does That Mean for Diesel Fuel Prices?

Posted on January 22nd, 2016

Teal Oil Barrels

The price of oil keeps falling. And falling. It has to stop somewhere, right?

After consistently dropping for a year and a half, U.S. crude has fallen another 17 percent since the start of the year and is now in-line with prices not seen since 2003.

“All you can do is forecast direction, and the direction is still down,” says Larry Goldstein of the Energy Policy Research Foundation.

Since the global supply of crude is at a high when demand is not growing proportionally, the price of crude steadily declines to make ends meet. Currently, the national average of diesel fuel is below $2.00 a gallon.

Why do diesel prices have a strong correlation to crude prices?

Refineries in the United States produce an average of 12 gallons of diesel fuel per barrel of crude oil. Since, diesel fuel is a product of crude oil, diesel prices fall as crude prices decline. However, in a situation where the quantity of supply overtakes quantity of consumption, more oil does not result in lower prices. In this scenario, gas prices reach a price floor, which is determined by the demand of diesel fuel, and leftover gas is placed in an inventory.

Will it end?

Oil traders and Wall Street analysts expect further declines in oil prices. Some have even predicted that prices will approach $20 a barrel. However, prices will rise sooner or later. Just as $100 oil encouraged the new production that contributed to a fall in prices, $30 oil is discouraging big investments needed for production for the future.

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