Monday, January 23, 2017

More About Predicting the Future

Americans tend to make knee-jerk reactions to changing economic conditions.  As the gas prices have remained low, the switch is on to bigger cars and trucks.

In April we heard the news:  “Pickup truck sales surged in the first quarter as businesses rushed to replace aging equipment and consumers, encouraged by both low gas prices and interest rates, purchased bigger vehicles.”

A little later in the year the news came, “General Motors' U.S. sales plunged 18% in May as low gasoline prices took a bite out of car sales.”

Finally in November “General Motors announced…that it will permanently lay off nearly 2,100 U.S. auto workers in the coming months. Why? Apparently because drivers are buying fewer smaller cars.”

This was not a surprise.  It is totally consistent with past consumer behavior.  People make decisions not based on their needs, but based on the short-term conditions.  Do they expect gas prices to remain low forever, or even for the average length of time they own their cars?  This seems not even to be a consideration.

When will we see the trend change and gas prices to once again move up?  No one really knows.  One energy forecasting website predicts that the price of oil will increase by about 15% in the next 6 months.  That’s not too bad.  The US Energy Information Administration (EIA) forecasts oil and gasoline prices around 20% higher this year, but there is a possibility for prices to swing up to more than double 2016 prices before settling back down.

Another site provides an interesting review of all the factors involved in the supply and demand for oil and gasoline.  What effect will the OPEC production cutback last month have?  What about increased Iranian production now that sanctions have been lifted?  Will the shale oil industry in the US and Canada survive long enough at the current prices to make a difference?  Will worldwide demand continue to grow despite an easing in the growth of the Chinese economy?  Will other factors affect the value of the dollar, the currency used to price oil internationally?  Will speculation cause the kinds of huge price swings we have seen in the past?  All these and others could send the price of gasoline skyward.

Do you think the average American car buyers look at any of this information before making the decision to trade in small cars or sedans for a large car or pickup truck?  This is very doubtful.  Instead they look at the posted price at the corner gas station and take the plunge.  In this case it may work out with prices remaining relatively low for quite a while, but the price of oil is very unpredictable and volatile.

Sooner or later, when the price of a gallon of gasoline rises again to around $4 and we hear the news of people in panic, trying to make ends meet, should we be surprised?  Yet the news media will make a big deal of it, saying how unfair it is, interviewing people at the pump complaining as they fill their trucks and large SUVs.  But the news media is always looking for an opportunity to feature victims, refusing to ask what behavior led them to their current predicament or to even entertain the notion that they may have had anything to do with it.

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